Weekly update: Macroeconomic indicators’ impact on debt securities

Market Realist

Will the Fed taper continue?

As bond markets eagerly await the outcome of the Federal Open Market Committee (FOMC) meeting, two significant speeches delivered by Chicago Fed’s Charles Evans, and Philadelphia Fed’s Charles Plosser on March 10 were understandably, the highlights of this week. Continuing reductions in the pace of the Fed’s asset-purchase program, also known as tapering, was a clear message from both Evans and Plosser. Tapering remains a key variable for the 2014 bond market outlook.

Small Business Optimism Index

The National Federation of Independent Business (NFIB), a nonprofit association representing small and independent businesses, released the Small Business Optimism Index on March 13. The index is a composite of components including employment, earnings, etc.


The index fell by 2.7 points over January to 91.4 in February due to a weakening in sales and economic expectations.

Mortgage Bankers Association Purchase Applications Index

The Mortgage Bankers Association released Purchase Applications Index on March 12. The index is a leading indicator of the housing market.


The purchase index was down by 1% and the refinance index down by 3%. The year-on-year rate for the purchase index, down by 17%, indicated reduction in mortgage demand.

Job Openings and Labor Turnover Survey (JOLTS)

The JOLTS, which includes monthly estimates of job openings, hires, quits, layoffs, etc. was released on March 11.


There were four million job openings in January. The hires rate and separations rate were little changed, as was the quits rate for total nonfarm and government. The quits rate for private sector changed slightly by 1.9%.

Effects of the indicators on the fixed income markets

Consumer-centric indicators such as Small Business Optimism Index and Purchase Applications Index and labor-centric indicators such as JOLTS provide indications about the economy’s health. An increase in economic activity indicates that the Fed would continue with its tapering. This affects bond ETFs like iShares 20+ Year Treasury Bond (TLT), Vanguard Total Bond Market (BND), iShares Core Total U.S. Bond Market (AGG), and the companies in the FMCG space like Target (TGT) and Proctor & Gamble (PG).

The changes in the recently published JOLTS report have been insignificant leaving the bond markets unaffected. Both Small Business Optimism Index and Purchase Applications Index, however, showed negative movements. This brings one back to the virtuous cycle of discussion on whether the U.S. economy has picked up enough momentum to support tapering.

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