The Economy and Bond Market Radar (April 9, 2012)
Treasury yields changed little this week, but the general direction was down as global economic data was weaker than generally expected. European concerns resurfaced this week as 10-year Spanish government bond yields spiked to the highest level this year on tepid demand at this week’s auction. Spain has become the focus in the markets with a difficult budget situation and already high unemployment. This is a reminder that many of the difficulties facing the markets have not been resolved and are likely to surface again as we move through the year.
Strengths
- The ISM Manufacturing Index rose in March and was ahead of expectations, indicating continuing economic expansion in the manufacturing area.
- The non-Manufacturing ISM Index fell in March, but remains well into expansion mode.
- The four-week average for the weekly initial jobless claims continues to make new lows and is viewed as a positive leading indicator for the overall economy.
Weaknesses
- Global manufacturing data disappointed as eurozone PMI remained weak and continued to indicate contraction in manufacturing.
- Construction spending fell 1.1 percent in February even as weather was conducive to growth.
- Eurozone retail sales fell 0.1 percent in February as austerity and high unemployment take their toll.
Opportunities
- Over the past couple of weeks, bonds have staged as investors reassessed the global growth outlook. That trend appears likely to continue as long as China is comfortable with slower growth.
Threats
- Rising oil and gasoline prices combined with liquidity implications of global easing, led by Europe, may raise the prospect of a reappearance of higher inflation going forward.
