How will this week’s consumption indicators impact debt securities?

Part 4
How will this week’s consumption indicators impact debt securities? (Part 4 of 8)

Will small business optimism increase, boosting fixed income ETFs?

What is the NFIB Small Business Optimism Index?

The National Federation of Independent Business (or NFIB) will release the Small Business Optimism Index on Tuesday, March 13.

The index is a monthly survey conducted by the NFIB of its members, which gauges small business sentiment by ten key metrics: plans to increase employment, plans to make capital outlays, plans to increase inventories, expectations of economic improvement, expectations of higher real sales, current inventory, current job openings, expected credit conditions, whether now is a good time to expand, and earnings trends.

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What did last month’s reading indicate?

The Small Business Optimism Index increased by 0.2 points, to 94.1, in January. Although this was the third consecutive monthly increase, the size of the increase declined on a monthly basis, with only three of the ten index components showing improvement (plans to increase employment, higher real sales, and higher current inventories), two unchanged, and five lower (notably those small businesses reporting higher earnings trends and those planning to increase inventories). This indicated that the small business half of the economy was still adding little growth beyond that needed to support population growth.

Seasonally adjusted, net 19% of businesses planned price hikes (unchanged from last month, yet nowhere near the net 2% of businesses that actually reported higher prices, which indicated a weak price environment, implying a buyer’s market.

How does tapering impact small businesses?

The survey also reported hardly any impact on small businesses’ views on credit markets from the onset of tapering, and nor were small businesses directly impacted when quantitative easing (or QE) started, as nearly two-thirds of respondents showed no interest in borrowing and some had, in fact, complained of lack of access.

How does the index reading affect fixed income investors?

Apart from an increase or decrease in the index indicating an increase or decrease in economic activity and growth, this reading has limited relevance for fixed income investors. An increase in economic activity would indicate, other things remaining constant, that the Fed would cease its monetary stimulus policies. This would lower liquidity, raise interest rates, and lower bond prices, affecting ETFs like TLT, BND, AGG, and IEF. Conversely, other factors remaining constant, it could positively impact a large-cap ETF like the SPDR S&P 500 (SPY), which tracks the S&P 500. A decline in economic activity would imply the opposite.

To read about this week’s lone housing indicator due for release on Wednesday, move on to Part 5 of this series.

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