The US Treasury market appeared to be more interested in the political ‘goings on’ in the UK rather than the domestic landscape yesterday, indicating that we may be at yield levels fairly priced for the current time. Although we now believe the Fed has moved off their pre-destined path to a higher funds rate; now heavily data dependent, one-month data will not be of a major focus, rather trends in the path of the data, thus the yield curve also awaits further evidence.
The Beige Book, the Fed’s report on current economic conditions, also appeared reflective of the current situation with 8 Fed districts reporting ‘modest to moderate growth’ down from 10 in the last report. Firms remained optimistic but less so than previously, on account of market volatility, rising interest rates, falling energy prices and elevated trade and political uncertainty. Manufacturing growth also slowed, particularly in the auto and energy sectors, and lower energy prices caused firms in the sector to pull back future capital spending plans. Indeed New York and Kansas City reported flat growth.
Domestic US data continues to be on the weaker side of market expectations with PPI yesterday a small miss on the calls and New York’s Empire Manufacturing Index for December, tying into the Beige Book, a rather larger miss coming in at only +3.9 from a previous +11.5. However, this could be a catch up to the ISM report in December, which was much weaker than the Empire indicator.
Fed speakers yesterday also seemed to be awaiting as George, a voting member, from the Kansas City Fed said ‘It might be a good time to pause our interest rate normalisation, study the incoming evidence and data, and verify our current location’. This is bit of a change for Esther George who usually takes a rather more hawkish stance. We also had Robert Kaplan, a non-voter, from the Dallas Fed saying ‘it would be wise to give time and be patient’ and noted that the most recent jobs report was positive, ‘but it tends to be a lagging indicator’.
Anyone that uses Black cabs in London this time of year will notice the drivers seldom smile. That is because we are in what is known within the trade as ‘Kipper season’, when their takings go down as people cut costs after the extravagance of the holidays, looks like we have our own version in the bond market even though this solitude is not expected to last very long, unlike black cab drivers, who always seem to have something to moan about!