Global Weakness Drives Bid for Treasuries, Sends Yields Lower

 The September Federal Open Market Committee minutes revealed growing concern among committee members that a slowdown in global growth could have adverse effects on the US economy. The September minutes disclosed that some FOMC members fear that weakness in China, Japan and the Euro-Zone economies, along with a stronger US dollar, will create headwinds for US exporters and keep inflation well below the Fed’s long run 2% target. The energy sector, which has been an engine for domestic growth, was hit hard on Thursday, with the price of US benchmark crude oil falling 1.8 percent. In addition to a more dovish tone from the Fed, the International Monetary Fund (IMF) cut their global economic growth forecasts. The IMF’s projections for Eurozone growth in 2014 fell from 1.6 to 1.3 percent. In Japan, the IMF trimmed growth expectations for the year by 0.7 percent to 0.9 percent. Market participants have responded by buying Treasuries. On Friday, the 10 year Treasury yield dropped to 2.30 percent, its lowest level since 2013. Despite the news out of the FOMC and IMF last week, the question still remains: ‘Can the US economy decouple from the rest of the world?’ Given consistently strong US employment and manufacturing data, as well as a housing market that has shown signs of life, we think growth can continue at a measured pace in the United States. 
Sources: New York Times, Bloomberg