Stronger Data Should Lead to Higher Yields
The Federal Reserve changed the dynamic on Wednesday by tapering its bond purchase program but conveying forward guidance that was more dovish than expected. Stocks soared and bonds initially sold off, but the 10-year was able to recover which should only be temporary.
Recent economic data has been stronger than expected for November which should be the driving force behind the rise in US yields. Manufacturing data was reported by the Institute of Supply Management. The manufacturing number came in stronger than expected at 57.3 the highest since April of 2011. The New Orders Index increased in November by 3 percentage points to 63.6 percent, which is a guide to future headline numbers and the Production Index increased by 2 percentage points to 62.8 percent. The Employment Index registered 56.5 percent, an increase of 3.3 percentage points compared to October’s reading of 53.2 percent. This reflects the highest reading since April 2012 when the Employment Index registered 56.8 percent.
On Wednesday housing numbers were reported that were also stronger than expected. The Commerce Department released Housing Starts. Starts soared 22.7% in November to a rate of 1.09 million, the highest rate since February 2008, with surges for single-family homes and apartments. Economists polled had expected overall housing starts in November to hit a rate of 963,000. Starts for single-family homes rose 20.8% in November to a rate of 727,000, the highest rate since March 2008, according to the U.S. Department of Commerce.
Growth Could Push Yields Higher
The TLT (iShares Barclays 20+ Year Yield) is an ETF that tracks the long end of the yield curve. If economic data in the US and globally continue to perform at the pace seen with November’s numbers yields will likely move higher, driving the price of the TLT lower.
The chart above shows that the TLT has is forming a topping pattern and a close below 102 could quickly lead to a test of weekly resistance near $100. Momentum has turned negative with the MACD (moving average convergence divergence) index generating a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread. The RSI is moving lower with price action and is printing near 41, which is on the lower end of the neutral range.
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