U.S. Treasury yields finished higher last week despite the return of volatility late in the week. For the period, yields rose during four out of five trading sessions. This suggests that professionals weren't fazed by the mixed economic data that grabbed the headlines at times last week, leading a few analysts to declare the U.S. economy had peaked.
Last week, U.S. 2-year Treasury yield settled at 2.52 percent, up 0.03 percent. The benchmark 10-year Treasury yield settled at 2.66 percent, up 0.03 percent and the 30-year Treasury yield finished at 3.00 percent, up 0.03 percent.
As a trader, sometimes you have to look beyond the headlines and draw your own conclusions from the price action. Furthermore, you also have to look at how every piece of economic data fits into the big picture before you can conclude the U.S. economy is peaking. Additionally, you have to have conviction to turn your analysis into a trade. After all, isn't that why we're all here?
If your interpretation of the weaker-than-expected December U.S. retail sales and industrial production reports leads you to conclude that the U.S. economy has peaked then you are essentially saying that you want to be long Treasurys because interest rates are poised to move lower. However, the price action on Friday suggests you may be wrong.
Economic Data Mixed but Yields Continued to Rise
A generally optimistic view of U.S.-China trade relations underpinned U.S. Treasurys at the start of trading last week. Yields were further supported by Tuesday's upbeat JOLTS Job Openings report. This report confirmed that labor-market conditions remain tight. This tends to be bearish for Treasury notes and bonds.
Wednesday was another interesting day for headline traders. The headline inflation story was U.S. consumer prices were unchanged for a third straight month in January, which could allow the Federal Reserve to hold interest rates steady for a while. But what did Treasury yields do? They rose.
Yields went up because the so-called Core Consumer Price Index gained 0.2 percent, rising by the same margin for a fifth straight month. In the 12 months through January, the Core CPI rose 2.2 percent for a third straight month.
On Thursday, the short-term uptrend in U.S. Treasury yields was interrupted by a worse-than-expected U.S. retail sales report. Treasury yields fell as investors sought safety following disappointing retail sales data. The data was such a surprise that several economists started predicting a U.S. recession during the fourth quarter of 2019. I wonder if these were the same guys calling for a recession during the stock market's "mini-bear market" in late 2018.
This news encouraged several analysts to call a top in the U.S. economy based on what I read on Friday. However, I don't think they were looking at the whole picture. Instead, they were reacting to the headline and the sell-off in the equity markets.
Ward McCarthy, chief financial economist at Jefferies, said it best in a note, "Taken literally, this data release would indicate that the consumer sector collapsed in December. This release is such an outlier and so incongruous with the general trend in consumer spending, holiday consumer sales reports and holiday consumer credit data that it does raise suspicions of data reliability."
"In the context of the government shutdown and delayed data collection, we still think that some suspicion is warranted," McCarthy said.
Finally, on Friday, Treasury yields rose again. This time in the face of a drop in U.S. Industrial Production. Once again, the headline traders were trapped on the wrong side of the market.
Look Beyond Headlines to Find Economic Strength
Last week's price action in the Treasury markets, the U.S. equity markets and the U.S. Dollar strongly suggest that those calling for a top in the U.S. economy based on the headline inflation number, the weak retail sales report and the drop in industrial production, have wrongly determined that the U.S. economy has topped. These reports contain more noise given short-term disruptions like the government shutdown, winter storms, the December plunge in oil and equity markets and the on-going U.S.-China trade dispute.
These short-term data glitches are likely to be smoothed out over the long-run as the economy strengthens further. Additionally, last week's JOLTS report and the robust January Non-Farm Payrolls reports seem to have been overlooked by those analysts bearish on the economy. Both reports indicate a tight labor market where worker shortages have persisted. This is likely to lead to firmer wages and higher inflation later this year. Given these conditions, the Fed is likely to raise rates sooner-than-expected because of a strong economy.
This article was originally posted on FX Empire
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