Treasury yields and economic data
Treasury yields, both in the primary and secondary markets, are influenced greatly by economic data. Better-than-expected data usually move Treasury yields (IEF) up, which lowers bond (BND) prices. Nominal bond yields, particularly at the long end of the curve, also move up and down, depending on higher or lower inflation expectations. Last week, U.S. economic data covered a number of sectors, including housing, employment, manufacturing, and inflation.
National level gauges of economic activity turn trend
The Chicago Fed National Activity Index (or CFNAI) for September and the Kansas City Fed Manufacturing Index for October were released last week. The CFNAI, a nationwide measure of economic activity, surged to 0.47 in September, from -0.25 in August. The reading was boosted primarily by improvements in the manufacturing and employment components.
The Kansas City Fed Manufacturing Index is a regional measure of manufacturing activity. October’s report showed positive but slowing growth in the Tenth District, with the headline “declining from 6 in September, to 4 in October.”
Housing indicators trended positive last week
All three housing indicators released last week were positive. Existing and new home sales for September beat expectations. New home sales came in at a seasonally adjusted annual pace of 467,000, the highest level since July 2008.
Home price appreciation, according to the Federal Housing Finance Agency’s index, came in at 0.5% in August, beating consensus estimates of 0.3%. Housing is a very critical component of the economy. Not only does it signal consumer confidence, but it also exercises a multiplier effect on other sectors through the construction value chain. However, investors should note that housing indicators have been capricious this year with both ups and downs.
Initial jobless claims
Initial jobless claims once again beat market expectations, coming in at 283,000 for the week of October 18. More importantly, the four-week moving average declined for the sixth consecutive week to 281,000. The latter is a more reliable indicator as it evens out week-to-week fluctuations.
Consumer Price Index (or CPI): Declining inflation poses a problem for the Fed
The CPI is one of the most commonly used inflation measures by analysts and economists. The principal amount on TIPS securities is also adjusted based on the CPI (refer to Parts 4 and 5 for more details). The CPI for September came in at an annualized rate of ~1.7%, the fourth straight monthly decline.
Declining inflation has important implications for consumption spending and economic growth. Long-term inflation at the 2% level is also one of the Fed’s Congress-mandated goals. Although the Fed uses the change in the Personal Consumption Expenditure Price Index (or PCEPI) as its favored inflation measure, the CPI is usually higher than PCEPI inflation. The Fed won’t consider an increase in the Fed funds rate unless inflation is near its long-term target. Hence, inflation measures are watched closely by both bond (UST) and stock (QQQ) (IVV) investors.
Treasury yield curve
The next section will discuss the impact of the above indicators on the Treasury yield curve.