5 Charts Showing The Taper EffectAugust 19, 2014
We noted yesterday how treasury bond yields keep falling along with the reduction of fed purchases. This inspired us to dig deeper into our chart library to see how other asset classes or economic statistics have performed in relation to our taper model.
Starting with the Federal Funds Rate, it has moved in line with the taper projection so far this year and looks like it could be back in the 12-14 bps range before too long.
Junk bond spreads were looking like they were defying the taper model, that is until a relatively minor liquidation in July pushed spreads out by over 100 basis points. This model suggests the liquidation in high yield has more room to go.
Our one year diffusion index of PMIs around the world has slowed right along side the reduction in Fed purchases. The one year diffusion index measures the number of PMI surveys that are higher than they were a year ago. This has moved from a max reading where all 17 PMIs we track were higher than a year ago to a more neutral reading of 10 PMIs are higher and 7 PMIs are lower.
Inflation expectations, as measured by 10-year TIPS, have been on a steady decline and are at their lowest levels in over a year.
Finally, the number of stocks trading above their 200-day moving average has dropped back in line with what the taper model would suggest. If this continues to follow suit, we could see the fewest number of stocks trading above their 200-day moving average in over 2+ years.