The Week in Review

The Treasury market tread water in a quiet week. Yields on the 10-year note rose 2bp to close at 2.536. The highlight of the week was the exceptionally strong 10-year TIPS auction on Thursday.

The notes, which are sold by the Treasury Department to protect against inflation, were sold at a yield of .339, the lowest since last May. Demand from indirect bidders, which include foreign central banks, was at an all-time high of 66.3 percent compared to an average of 52.2 percent.

This strong demand for TIPS is an indication of the concerns by the street and central banks about inflationary pressures going forward.

Economic data for the week was generally mixed, but highlighted by weak earnings reports of major retailers and the continued overall sluggishness of the housing data.

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The Fed minutes, as well as the abundance of Fed speakers, confirmed that there is no certain timeline for raising the funds rate. Market expectations currently have mid-2015 for the first tightening.

Eurozone yields backed up slightly after a weaker-than-expected German 10-year note Bund auction.

The Week Ahead: Taking the Consumer's Pulse

The market will get a closer look at whether a sustainable improvement in household and business spending will boost second quarter GDP with this week's data.

Durable goods orders are released on Tuesday and Personal Income and Spending data is released on Friday. The first revision to first quarter GDP on Thursday is expected to show the first quarter of negative growth in over three years. The data for the month ends with the release of Chicago Purchasing Manager's Index and University of Michigan Consumer Confidence Index on Friday.

The calendar does not have enough top-tier releases to push yields out of its recent ranges. There may be narrow range between 2.57 percent and 2.48 percent for the week. The following week features reports on the U.S. labor market, as well as a more accommodative policy announced by the ECB; this could provide a retest of the recent low in yields.

This Week's Theme

More sustainable consumer spending and business investment are widely expected to drive the U.S. economy in the second half of 2014 and following quarters. Many forecasters have written off the poor first quarter to the severe winter -- the problem is that recent data has not supported this scenario.

The recent strong hiring data may be masking a larger issue for the market. Unfortunately, there is still so much competition for jobs that recent improvements in the labor market have not translated into higher wages. Without wage growth as a byproduct of a tighter labor market, a return to pre-recession spending levels is not in the offing. This week will get measures of household income and spending.

Monetary policy, especially unusual measures like QE, cannot improve the economy without this linkage between job growth and rising household incomes -- just creating more jobs is not enough. Competition for these new jobs is coming from non-traditional sources, such as offshore labor pools or the replacement of human capital with technology.

Wages are under pressure leaving household balance sheets still in need of repair and consumer confidence is unsteady. Five years of accommodative policy has not produced the better economy that was expected.

The astute trader can take advantage of this. As investors face the impending end of asset purchases, it is clear the direction of both the housing market and consumer retail sector remains uncertain. If the end of QE does lead to a weaker economy, fixed Income - and U.S. Treasuries, in particular - will remain an attractive asset class.

© 2014 Benzinga does not provide investment advice. All rights reserved.

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