A Cause for Pause...Especially for Bond Investors

Today's economic data indicate a potential slowing in the U.S. economy. Both individuals and businesses slowed their purchases of big-ticket items during the month of December. Declines were the most in six months.


Until today, economic indicators have generally been surprising to the upside, most notably unemployment falling to 6.7 percent and gross domestic product accelerating to 4.1 percent. The trend appears evident in the Citigroup Economic Surprise Indicator, where better-than-expected data add to the index, and worse-than-expected data subtract.


The index recently hit a two-year high... that's the good news. Unfortunately, it rarely stays elevated for an extended period. Either a few bad readings create a reality check or economists revise their forecasts upward, making the numbers harder to beat. Either way, the index usually falls in short order.

Bond investors would be well served to note the direction of the index, as it mirrors movements in the 10-year Treasury yield.


A Bloomberg survey of economists conducted on January 10 indicates a strong belief that the Federal Reserve will announce plans tomorrow to taper bond purchases by an additional $10 billion a month. If this is indeed "priced in," then any dovish language, whether related to today's data or recent declines in emerging markets, could send yields back to 2.5 percent from the current 2.71 percent. We believe this is the path of least resistance.

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