- Retail Sales?
The answers? We don’t know. Nobody knows.
That’s because one of the side effects of the government shutdown is that the departments that collect and publish economic information have not been. The Bureau of Labor Statistics (BLS), which publishes payroll numbers as well as two of the most widely-followed inflation measures, CPI and PPI, was closed for the duration of the shutdown. And the Bureau of Economic Analysis (BEA), which publishes GDP, personal income, and a variety of other data, was also shuttered.
If you’re wondering what this means for the economy and markets, consider this: A month ago, all eyes were on the Federal Reserve, and all discussion was focused on when they would begin to taper their bond purchases and by how much. Were enough jobs being created? Were there signs of inflation on the horizon? How strong is US growth, and is it sufficient to support removing accommodation? Would the Fed move in December? 2014?
And then the US government shut down, and suddenly no one was talking about the Fed anymore. All focus shifted to the impact of furloughed workers on economic growth, and when Congress might raise the debt ceiling, and whether the Treasury would default on its debt.
But while the Fed discussion may have been temporarily moved to the back burner, it’s as important as ever in terms of influencing investment decisions. The information vacuum created by the shutdown not only makes it very difficult for investors to see how the economy is doing, it makes it impossible to project the next move of the Federal Reserve. For weeks we have been unable to observe growth, inflation, jobs and other metrics the Fed will use to assess when to taper their bond-buying program.
Now that the shutdown has come to an end, we would assume these agencies will be up and running again soon. So what can investors expect?
Basically, we’ll likely see a lot of data come into the market in a very short period of time. For example, it looks like we will get the September payroll and unemployment numbers (the most-watched pieces of economic data) next week, quickly followed by the October numbers in the first week of November. Similarly, we can expect to see closely-timed data for CPI, PPI, construction spending, retail sales, and a host of other data points.
The upshot for investors? Because of this data deluge, we could see heightened levels of market volatility as investors respond to each new piece of information. But, as Russ Koesterich pointed out in his last post, the silver lining of this debacle is that the Fed is likely to push off tapering for at least a little longer – delaying the inevitable backup in interest rates.
For fixed income investors, this means a couple of things. In the short term, a continued lower rate environment would be supportive of high yield bonds. Investors might also consider agency mortgage-backed securities, which should benefit from the Fed’s continued purchase of mortgage bonds . Longer term, rates will eventually rise – it’s just a question of when. This is why we’ve seen a lot of clients shifting bond portfolios to shorter duration securities, such as short duration credit, this past year.