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

Part 3
Importance of the Fed’s Beige Book for fixed income investors (Part 3 of 11)

Non-financial services: The demand for tech services strengthens

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.

What are non-financial services?

The Beige Book report on the various sectors in the economy covers non-financial services as well. These include information technology, consulting, logistics, healthcare, internet technology, restaurant, telecommunications, and distribution firms; real estate and legal services; and media and advertising among others.

Part 3Enlarge GraphHow does the Beige Book’s report of the non-financial services 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 will reduce liquidity and raise interest rates on the bonds causing bond prices to fall. The reverse would hold true for a decrease in business activity.

What did the Fed’s Beige Book, issued in March, say about economic conditions in non-financial service industries?

The March Beige Book reported mixed demand for non-financial services. Demand for technology-related services was strong in the Boston and San Francisco districts. Some districts including New York and Philadelphia reported weather-related slowdown in service activity. San Francisco reported growth in cloud-computing and optimistic about revenue growth this quarter. This may benefit cloud service providers like Google (GOOG), Oracle (ORCL), Microsoft (MSFT), Salesforce.com (CRM), and Amazon (AMZN).

Boston reported stronger than expected demand for IT and software services. Richmond reported flat services revenues, while the Kansas City district described them as “stable” and anticipated an acceleration in business activity. Firms in Minnesota reported improvement in activity. Dallas and Minneapolis were optimistic regarding the future direction of service industries, while St. Louis maintained a negative outlook on planned business activity.

Logistics across the country have been adversely affected by the unusually cold winter with disrupted supply chains and delayed shipments reported in several districts. Dallas reported a decline in air cargo and container volumes; Atlanta and Richmond reported an increase in auto shipments at ports. The Kansas City district was cautiously upbeat about transportation activity in 2014, while Cleveland expected the same or slightly higher levels in activity observed last year.

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