By the end of the first quarter, U.S. economic data began to improve somewhat from what had been winter-related economic weakness. After disappointing results from various sectors of the U.S. economy, higher auto sales, improving business activity, and overall job creation that is generally in line with forecasts have helped shape expectations for a comparatively better spring.
How the yield curve might react to better growth
In our view, as the U.S. economy continues to strengthen in 2014, Treasury yields, particularly in the intermediate part of the yield curve, are likely to move higher. However, we don’t believe rates are likely to rise so quickly that the shift will undermine economic growth.
Employment factors signal the strength of the recovery
We continue to think that, with the economy looking better, the key to the pace of normalization can be found in the labor market. Chair Yellen repeated her view that much of the decline in labor participation is cyclical rather than structural. This view is reflected in the March labor report, as it showed a rise in participation that one would expect from a normalizing economy.
Wage growth rates could be the fulcrum of coming policy shifts
The questionable factor in this formula for normalization, we believe, is rising wages. If Yellen is correct, the economy should be able to grow strongly for a longer period before inflationary pressures emerge in the labor market. But if she is wrong and participation does not continue to rebound, higher wages among a smaller population of skilled workers could begin to push up labor costs that may not be offset by higher productivity. If this should come to pass, we think the stance of monetary policy would have to shift quickly, potentially leading to a faster and more dramatic rise in rates than the market currently expects.
Read Putnam Fixed Income Outlook.
For informational purposes only. Not an investment recommendation.
This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
Putnam Retail Management.