Fixed Income Market Commentary by Kevin Giddis

April 18, 2019

The Treasury market is trading higher this morning, even though Retail Sales exceeded expectations. Retail Sales for March rose 1.6% as a headline number and up 1.2% when you remove the volatile Autos component. Jobless Claims for the week ending April 13th fell 5,000 to 192,000. If there was a negative release, it would be that the Philadelphia Fed Business Survey came in at 8.5 in April vs. March’s 13.7. All in all, this continues to suggest that the U.S. economy is in good shape, but mostly uneven in its results. So why are bond prices higher? You really need to go back to a weaker than expected data release in Europe, suggesting that the European economy is struggling. This revelation made Treasuries more attractive, and the buyers stepped in. This morning it’s more about short-covering and/or position squaring before the early close today and the Good Friday holiday. But even if those events weren’t on the calendar, there doesn’t seem to be a lot of momentum to take rates higher. Tomorrow the U.S. Census Bureau will release Housing Starts (exp. Up 5.7%) and Building Permits (exp. Up 0.7%), even though the market nor its players will be in. Next week’s calendar is more about housing when the National Association of Realtors releases Existing Home Sales for March (exp. down 3.5%) on Monday. On Tuesday we will get New Home Sales (exp. down 2.6%) for the same month. If these numbers come in close to their forecasts, you really have to wonder which data investors should pay attention to when trying to make investment decisions. Should I pay attention to the positive economic data like Retail Sales or should I pay attention to the negative data that could come from housing? The likely answer for the fixed income investor, big or small, is neither. The data that you need to watch closely is any of the data that signals a direction for inflation. Numbers like wages via the Average Hourly Earnings release, the Core CPI, and the Core PCE, all of which point to subdued inflation. These weaker than expected numbers are the main reason why the Fed changed course in December, and why fixed income investors increased not only their durations, but their credit risk as well. Until that data makes a move higher, the Fed is likely to stay put, and investors get a rare opportunity to see the future today. Something we will address again on Monday. Have a good holiday.

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