Bad News is Good News Again

Global CIO Commentary by Scott Minerd

The cold snap in the eastern United States is continuing into February and could have a dramatic impact on economic output. Interesting research from Bank of America shows that adverse weather could reduce first quarter economic growth by 1-2 percent. Our analysis below shows the negative effect of frigid Januaries on retail sales. The potential economic damage from storm after storm raises the prospect that the U.S. Federal Reserve could slow its pre-stated tapering course.

If we see real evidence of a U.S. economic slowdown, more liquidity from the Fed can be expected. Investors still have faith in the Fed’s ability to make further accommodations, as evidenced by how the U.S. stock market took last Friday’s tepid jobs report for January in stride. This development takes us back to the "Alice in Wonderland" world where bad news can be good news for stocks and bonds.

The near-term risk is to the downside for U.S. 10-year Treasury yields, which could fall from the current level of about 2.76 percent to closer to 2 percent. Not so long ago, at the end of December, the 10-year rose above 3 percent and many investors presumed rates would continue rising in a secular bear market for fixed income. How quickly things change.

Cold Weather Dampening U.S. Economic Activity

The effects of December’s frigid temperatures have already been seen in recent U.S. economic data releases. With January temperatures more than three degrees colder than average, it is likely that economic activity will continue to be depressed in the first month of the year. Retail sales show a particularly strong correlation with temperatures in January, suggesting that data for January will likely show restrained growth.

AVERAGE U.S. JANUARY TEMPERATURE AND JANUARY RETAIL SALES

Source: Haver, Guggenheim Investments. Data as of 1/31/2014.

Economic Data Releases

More Adverse U.S. Weather Leads to Weak Payrolls Report

• Non-farm payrolls showed a second month of weakness, with the U.S. economy adding just 113,000 jobs in January. Job losses were concentrated in retail and government sectors, while manufacturing and construction payrolls added more than half of the total new jobs.
• The U.S. unemployment rate edged down to 6.6 percent due to a strong gain in the household employment survey.
• The average work week held steady at 34.4 hours, while average hourly earnings edged up 0.2 percent in January.
• Jobless claims settled back down to 331,000 for the week ended January 31 following a 22,000 spike the previous month.
• The NFIB Small Business Optimism Index ticked up to 94.1 in January from 93.9 in December, recovering optimism levels from last summer after a downturn in late 2013.

German Data Slips, Puzzling Chinese Export Data

• German exports unexpectedly fell in December, down 0.9 percent, the first decrease since July. Germany’s trade balance ended 2013 at all-time highs.
• December industrial production fell across the euro zone, with output down 0.6 percent in Germany and 0.3 percent in France following strong production in November.
• Chinese exports unexpectedly jumped 10.6 percent in January, though there are concerns about the reliability of the data.
• China’s HSBC Services PMI registered 50.7 for January, the second lowest reading since the index began in 2005.
• Japan’s Economy Watchers Survey of current conditions decreased to 54.7 in January after increasing the previous two months. Worsening sentiment may reflect concerns about an upcoming tax hike in April.

VIDEOS AND PODCASTS

 

2022’s Upside: The Fed Has Put the Income Back in Fixed Income

Anne Walsh, Chief Investment Officer for Fixed Income at Guggenheim Investments, joined Asset TV to discuss macroeconomic conditions, risk, and relative value in the bond market.

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2022’s Upside: The Fed Has Put the Income Back in Fixed Income

 

Macro Markets Podcast Episode 26: Mortgage-Backed Securities, Structured Credit, Market Liquidity

Karthik Narayanan, Head of Securitized for Guggenheim Investments, discusses value in the residential mortgage-backed securities market and other ABS sectors. Anne Walsh, Chief Investment Officer for Fixed Income, answers a listener question on liquidity. Jerry Cai, an economist in our Macroeconomic and Investment Research Group, brings the latest on the labor picture and an update on China.

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Macro Markets Podcast: Episode #26