Is the US economy pulling out of its first-quarter slump? Or does the recent slowdown in growth presage deeper troubles for the macro trend? A clearer view may emerge after this week’s economic reports, starting with today’s update on retail sales for March. Industrial production is on tap for tomorrow, followed by housing starts and jobless claims on Thursday. Meanwhile, Treasury yields remain low by recent standards as the market awaits fresh data to reassess the economic outlook and expectations for the Fed’s first interest rate hike.
After rising through early March, yields on government bonds have trended lower in the wake of softer economic data in the last several months. True, last week’s economic news was upbeat, but it remains to be seen if the glow will survive this week’s gauntlet of numbers. The crowd seems to be hedging its bets. The benchmark U.S. 10-Year yield slipped to 1.94% yesterday (April 13), close to a two-month low, based on data via Treasury.gov. Ditto for the 2-Year yield, which is widely considered to be the most sensitive point on the yield curve for rate expectations.
The market’s inflation expectations are still holding on to most of the recent gains, although the last several trading sessions remind that the upward trend has topped out for the moment as the crowd awaits fresh macro data. The implied inflation forecast (yield spread for the nominal 10-year Note less its inflation-indexed counterpart) fell to 1.80% yesterday (April 13), the lowest level since April 1. That’s a signal that pricing pressure is expected to remain weak for the near term, suggesting that the Fed is still likely to favor later rather than sooner for the first rate hike.
Deciding if rates are headed higher or lower may depend on what we see in the macro numbers in the days ahead. The burning question: Is US economic growth poised to re-accelerate after a rough winter and reclaim some of the luster that was on display in late-2014? Or is there an extended slowdown (or worse) waiting in the wings?
The case for managing expectations down starts with the slumping Q1 GDP estimates via the Atlanta Fed’s projections. The bank’s current GDPNow estimate (as of April 2) for this year’s growth is a trivial 0.1%, which is well below the modest 2.2% gain in last year’s Q4.
Recent numbers don’t look encouraging, but economists are expecting that the tide’s about to turn, starting with today’s monthly release on retail spending for March. Briefing.com’s consensus forecast calls for a strong rebound, with sales jumping 1.0% last month vs. substantial declines in each of the previous three months. But the outlook for industrial production looks challenged for March, while housing starts are projected to revive in the March report after February’s slide.
In sum, clarity is expected to remain in short supply about the economy’s near-term trend, based on forecasts for the days ahead. The question is whether the actual data tells a different story?