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Importance of the Fed’s Beige Book for fixed income investors

Part 4
Importance of the Fed’s Beige Book for fixed income investors (Part 4 of 11)

Manufacturing: Auto production increases despite adverse weather

The Fed’s Beige Book is published around two weeks ahead of its Federal Open Market Committee (or FOMC) meeting. The Beige Book contains information about how the various sectors have performed in the preceding six weeks commencing from the end of the previous FOMC meeting.

Part 4Enlarge GraphWhich industries does the manufacturing sector update include?

The Beige Book report of the various sectors in the economy covers manufacturing as well. The manufacturing sector includes the following industries: aerospace and defense, semi-conductors, steel, automobiles, tobacco, petroleum and coal-products manufacturers, food and beverage manufacturers, textile and apparel mills, paper and equipment manufacturers, among others.

What did the Fed’s Beige Book, issued in March, say about economic conditions in manufacturing industries?

Almost all districts reported a slowdown in production and sales over the period, citing adverse weather which caused utility outages, disrupted production schedules, and delayed deliveries. Philadelphia and Richmond districts reported a decline in orders and shipments in February. Steel producers in Cleveland and San Francisco reported low capacity utilization rates.

San Francisco also reported strong semi-conductor sales and growth in the commercial aerospace industry due to pending orders. Boston too reported strong semi-conductor sales. This may benefit semi-conductor companies like Advanced Micro Devices (AMD), Intel (INTC), and Integrated Device Technology Inc. (IDTI). High tech contacts in Dallas reported strong demand for memory chips.

Chicago reported strong automobile production despite adverse weather affecting selling patterns. Cleveland too reported higher auto production. This may translate to higher sales at automobile companies like Ford (F) and General Motors (GM) in the coming months. Most districts remain optimistic about growth in manufacturing activity over the coming months.

How does the Beige Book’s report of the manufacturing sector impact debt investors?

An increase in business activity represented by these industries would imply the economy is expanding and vice versa. Other factors remaining constant, an increase in business activity would mean the Fed would continue with its tapering of monthly asset purchases, which would reduce liquidity, raising interest rates on the bonds and causing bond prices to fall. The reverse would hold true for a decrease in business activity.

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