The week started with somewhat disappointing news: the Purchasing Managers’ Index (or PMI) for January, at 51.3, came in significantly lower than December’s figure, by 5.2. Despite there being an increase of 3.2 in consumer spending, markets anxiously awaited the employment status report issued on Friday. This is because—though the economy had expanded—the slowing pace of manufacturing led to fears that the expansion seen in the last few quarters would lose steam.
The 113,000 month-on-month increase in non-farm payrolls for January, though lower than what the markets had expected, was significant for several reasons. Firstly, it was higher than the 74,000 recorded in December. Secondly, several key industries like construction and manufacturing reported payroll increases, which supports economic expansion. Thirdly, the number of persons who exited the labor force due to the belief that there were no available jobs didn’t increase, as has been the case for several quarters. This was significant because this had been lowering the total labor force numbers in the past and dropping the unemployment rate artificially.
The key economic takeaway from the week is that there are signs of green shoots, although they’re inconsistent across industries. This means that the economy is beginning to pick up its pace, and the winding down of the Fed’s economic stimulus policies will begin to make their impact on the fixed income markets.
U.S. debt markets haven’t yet felt the impact of the Fed taper cutting down purchases of agency mortgage-backed securities and longer-term Treasuries due to the high volume of flight-to-safety flows precipitated by plummeting emerging markets. Bond markets, which were expected to fall following the onset of the taper, have rallied instead.
However, there could be some bittersweet news for bond investors: a very rapid curtailment of the Fed’s stimulus may actually hinder the economic recovery underway and force the Fed to reverse tapering plans, which would benefit bond prices.
To learn more about the recent flight-to-safety flows, see the Market Realist series How has emerging market turmoil impacted the US debt market?