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The Macro View – A strange decoupling evolving
These days, we are witnessing a discrepancy between the level of activity in the broad US economy and the housing related sectors. As our proprietary Index of Weekly Economic Indicators shows, we are currently at the strongest level of economic activity in since the stock bubble years. But the housing sector deteriorates by the day and since the housing market activity has been one of the strongest drivers behind construction and mortgage components in real GDP growth, we expect GDP to weaken from here.
This is apparently not the view taken by the bond market. 10-Year Treasury Notes have been declining in the last two weeks, taking the 10-year yield to 4.64% (the highest since February. The bond traders have been inspired by the Bernanke’s comments on Wednesday where he emphasized that the Fed had kept an inflation bias even after having changed the FOMC statement wording at the last rate decision meeting. Bernanke is opting to create a data-will-tell-you-as-we-go approach to monetary policy – very unlike that of Greenspan who would usually indicate the general direction of the Fed managed part of the yield curve.
We think that Treasuries will be rangebound in the next quarter or so. The market is waiting for either the deteriorating housing sector or the strong overall economy to win the battle over inflation/disinflation. We have a modestly bullish stance on Treasuries at this level, since the historical experiences dictate that the negative (disinflationary) effects from the faltering housing market will be stronger than the overall economy.
This picture is the same, but the stakes are higher in Japan. JGB’s have been rangebound since September last year and the last streak of inflation figures was again lower than expected. Yet, JGB’s are now trading at the lower end of the range (near 134) and 6-month rates have fallen back from their 10-year highs from the end of February. We have still not seen a convincing streak of figures from Japan and despite the turnaround in land and property prices, the Bank of Japan is not likely to hike rates any time soon with CPI figures still running below 0% YoY.