The Economy and Bond Market Treasury yields rallied as this week’s 10 and 30-year auctions received a good response and concerns of global stimulus removal have highlighted risks in the global recovery story. Economic data was mixed this week as December retail sales were surprisingly weak and seemed to contradict earlier data. On the other hand, industrial production rose for the sixth straight month and is giving a classic sign of economic recovery. The chart below graphs industrial production on a year-over-year basis and makes clear the change in direction of activity. 
Strengths
- Industrial production rose 0.6 percent in December and has now risen for six months in a row.
- Chinese imports and exports moved sharply higher in December, which implies continued improvement in not only China’s economy but the global economy.
- Consumer prices in December remained muted, rising only 0.1 percent and giving the Fed plenty of room for monetary policy flexibility.
Weaknesses
- Retail sales for December disappointed and appeared to contradict earlier data. One positive caveat was November data was revised higher making the numbers a little more palatable.
- The Obama administration is proposing a tax on big banks as a way to recoup the government’s support. The concern is that this appears somewhat punitive and more taxes and/or regulation are not an effective way to stimulate the economy.
- The Fed’s beige book reported only a modest improvement in the economy around year end, and cited weakness in real estate and labor markets.
Opportunities
- Expectations continue to build for growth in the U.S. in the current quarter, possibly as much as 4-5 percent. The global economic recovery appears to be taking hold.
Threats
- The U.S. is facing a long-term risk as Fitch cited the budget deficit as a threat to the U.S. AAA debt rating.
