Why economic data influenced high-grade bond yields

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Economic data

Economic data usually influences investment-grade bond yields, including Treasuries (TLT) and corporates (AGG) (LQD). Yields tend to fall on negative economic data. They rise when economic data is positive. Demand for safer investment-grade debt rises when economic growth concerns surface. This tends to raise their price and lower yields.

Part 5

Labor market and inflation indicators are in the spotlight right now. The Fed indicated that the start of the rate tightening cycle would depend on when the job market and inflation data meet their goals. Last week, a few key labor market and inflation indicators were released.

Inflation

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The Consumer Price Index (or CPI) is a key measure of retail inflation. It fell by 0.2% in August, month-over-month. The Producer Price Index (or PPI), for final demand goods, measures the prices received by U.S. producers. It was flat in August. Higher inflation increases nominal bond yields and vice versa. You’ll read more about the Fed’s inflation goal in Part 12 of this series.

Initial jobless claims

Weekly initial jobless claims fell unexpectedly to 280,000—compared to market expectations of 305,000. This benefited stock market exchange-traded funds (or ETFs) like the SPDR S&P 500 (SPY). SPY increased by 0.53% on Thursday, September 18.

Manufacturing indicators

Regional manufacturing surveys—the Empire State Manufacturing Survey and the Philadelphia Fed’s Manufacturing Survey—gave very upbeat readings. However, industrial production declined unexpectedly by 0.1% month-over-month in August. There were expectations for 0.3% growth.

Leading economic indicators (or LEI)

The Conference Board’s ten Leading Indicators Index (or LEI) for August increased by 0.2%. It missed the market expectations. The market expected an increase of 0.4%. The LEI signals turning points in business cycles. An increase in the LEI implies that economic activity will accelerate in the coming months and vice  versa.

The LEI reading was below par due to a decline in August’s housing starts. It was also impacted by an increase in unemployment claims in August. The slight upside in the LEI was driven by the spread between ten-year Treasuries (IEF) and the federal funds rate.

Another bond market indicator is the Leading Credit Index. It’s a composite of six different financial indicators. All of the indicators increased. This implies higher demand for loans and improved access to credit in the economy. Increased demand for loans implies higher consumption. This is a critical economic growth driver. It would also mean higher loan rates in the future.

How did bond yields react to the data? You’ll read about this in the next part of the series.

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