What Can the Weather Teach Us About Interest Rates?
In April, the U.S. Bureau of Economic Analysis (BEA) announced that its preliminary metric for how quickly our economy grew in the first three months of 2014 was annualized growth of 0.1%.
That doesn’t seem very quick at all.
Economists cited the brutal winter weather as the main culprit for flat growth. This week, the BEA will announce its revised estimate, as enough time has passed for the government to crunch more accurate data.
If this second reading of GDP doesn’t improve much, and there is no indication that it will, it’s a distinct possibility that yields will remain lower for longer. While the Fed has begun withdrawing its monthly bond-buying stimulus gradually – and until recently, market participants had been betting on rising rates – continued evidence of slow growth might force the central bank to change course and begin quantitative easing again, therefore keeping interest rates low. There is a precedent for this: Over the past five years, the Fed has not been afraid to intervene if the effects of its previous rounds of stimulus did not provide the necessary juice to meet growth or inflation targets.
At the same time, central bank intervention can only to do so much to force consumers and business to spend more money; there must be natural demand for goods and services. The polar vortex is behind us, and the weather is no longer an excuse. As the weather warms up and families plan their summer vacations, households and businesses begin to restock their respective inventories. There is also typically an increased demand for home buying during this time. Few things thrust the economy forward further than household formation, so investors should keep an eye on household data in the coming months.
But given how much economic ground there is to make up in 2014, and investors taking profits from stocks and seeking safety in bonds, don’t expect yields to rise in the short term.