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

Part 2
Importance of the Fed’s Beige Book for fixed income investors (Part 2 of 11)

The must-know indicators covered in the Fed’s Beige Book

The Beige Book contains a summary of all 12 reporting districts that gives an overall picture of the economic conditions prevailing in the country. Besides, each of the 12 Federal Reserve Banks prepares a district report which contains anecdotal data on economic trends in various sectors including retail, consumer spending and tourism; non-financial services; real estate and construction; manufacturing; banking and financial services; and agriculture and natural resources. The districts also report on wages and price level trends.

Part 2Enlarge GraphHow do retail, consumer spending & tourism indicators reported in the Beige Book affect fixed income investors?

The 12 districts report on retail, consumer spending, and tourism trends in their respective geographies in terms of general increases or decreases observed in the six-week period comprising the Beige Book cycle. The 12 district reports also make observations on how retail sales, consumer spending levels, and travel bookings compare to previous periods and whether they are in line with business expectations—if they exceed or fall short of expectations.

An increase in retail, consumer spending and tourism would mean that consumer confidence in the economy is high. As consumption spending makes up more than 70% of the economy, an increase in these indicators would imply the economy is growing, and other factors remaining constant, this would raise interest rates and lower bond prices. On the other hand, if personal income increases at a faster pace than personal consumption, the difference, that is, personal savings are likely to be invested in assets which could include bonds; other things remaining constant, this could increase bond prices and lower interest rates.

Macro-level increases in retail, consumer spending and tourism are likely to benefit companies in those sectors including Amazon (AMZN), Wal-Mart Stores (WMT), Target (TGT), Costco (COST), and Walgreens (WAG).

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