Data junkies will be going through withdrawal symptoms today. With no economic releases of relevance scheduled, there’s a vacuum to be filled. As it happens, the Federal Reserve’s quarterly Flow of Funds report was updated for the fourth quarter and released last Thursday. As always, there are enough numbers here to satisfy even the biggest data addicts. In an effort to help soothe the numerical DTs, we present sliver of the report via the following chart:
At a moment when anxiety seems to be on the rise in the bond market, we note that consumers’ inclination to dig ever deeper into debt took a chill pill in the fourth quarter. Consumer credit contracted for the first time in many a moon in last year’s fourth quarter, while the growth rate in home mortgage credit slowed a notch. Is Joe Sixpack rethinking his spending habits? If so, is there reason to think the recent strength in the economy will soon fade?
The question is laden with all the usual risks, and then some in light of the fact that the fixed-income set appears to be responding to the query with a resounding “no.” Indeed, the yield on the benchmark 10-year Treasury is just under 4.80% as we write this morning, the highest in 20 months.
The Flow of Funds report, of course, is a rear-view mirror. It’s the future that captures Mr. Market’s attention. On that front, there’s reason to think that the pullback in consumer credit was an aberration, or so the consensus seems to be saying. Judging by the futures market, the Fed is expected to raise Fed funds by 50 basis points to 5.0% by June. If so, the current yield of nearly 4.80% on the ten year looks a bit light.
Therein lies the dilemma for the bond market: Should the recent yield-curve inversion be maintained, or is that very much yesterday’s news? Before you answer, consider too that rates around the globe are on the rise of late. Nothing dramatic, but the change of direction for the moment speaks louder than the magnitude of the adjustment. Notably, the European Central Bank now looks set for a course of tightening, albeit in small doses. Ditto for the Bank of Japan, which has been the focus of much chatter over the past week with speculation that deflation is finally dead and buried in the Land of the Rising Sun.
Rising yields around the world and in the U.S. too. Meanwhile, the week ahead offers a hefty dose of new numbers to confirm or deny what lurks in the hearts and minds of traders. That includes tomorrow’s release of retail sales for February; followed on Wednesday with last month’s change in import prices; the latest on consumer prices dispensed on Thursday; and industrial production on Friday. If nothing else, this week will not suffer for lack of drama.