This morning, the US released 1Q15 GDP which came in far below the Street expectation of 1.0% with a print of .2%. Sort of on the brutal side. And what is really scary is that although the economy at least grew, albeit small, if it were not for the absolutely massive, world record Private Inventory build in the 1Q15, the US economy would have seen very negative growth. Another Q like that and the press will start using the R-word.
Why did Inventories build so much? Some may say the weather (an easy explanation) but I would say because of the strength of the U$. That strong U$ makes it very expensive for foreigners to buy US goods. So goods were produced but not bought and sat in warehouses as Inventory. This is very problematic. And don't forget the Post we put here http://www.highrockcapital.ca/1/post/2015/03/why-the-fomc-wont-raise-rates-this-year.html about why the FOMC won;t raise rates this year...because Inventory to Sales ratio went ballistic, due to the strong U$. This is all about global competitive currency devaluation.
So what can the Fed do? If they raise rates, the U$ may gather more stream and push the US economy into recession. If they don't raise rates, then they risk a further asset bubble in most asset classes. Quite a conundrum for them.
Another important fact is the following: Central Bankers have two tools to affect monetary policy: 1) raising and lowering the o/n rate and 2) trying to manipulate the currency (frowned in by G10 countries) So with the U$ going from a global trade weighted 80.00 a year ago to 100.00 in Mar/15, one could easily argue that the move of 25% strength in the U$ was a de facto huge amount of tightening in the US economy. They really don't need to raise front end rates right now because the currency has largely tightened for them.
We still don;t think they will raise rates at all but if they do, one thing we know for sure is the yield curve will flatten substantially...which means long bonds (30yr bonds) will rally while 2yr bonds will weaken off.