The Economy and Bond Market
Treasury yields moved higher this week on the back of large Treasury auctions that met somewhat tepid demand. Domestic economic news was relatively uneventful; it seemed the poor weather conditions in many parts of the country were a bigger story. Internationally it was a different story. Chinese bank lending jumped in January to one of the highest totals on record and Chinese M1 money supply grew 39 percent on a year-over-year basis, see chart below. The Chinese government has enacted numerous tightening measures in recent weeks and another was announced on Friday, raising bank reserve requirements by another 50 basis points. Growth indicators are very strong but the government tightening has begun and in the short term the economy has a lot of momentum but the government needs to be careful and not make adjustments too rapidly as it would have a global impact.
Strengths
- January retail sales rose 0.5 percent and beat market expectations.
- The National Federation of Independent Business (NFIB) small business index hit a 16 month high.
- Weekly initial jobless claims fell to 440,000 breaking the recent trend higher.
Weaknesses
- China is tightening policy on an almost weekly basis and that raises the risk of doing too much too soon.
- February’s University of Michigan Confidence Index fell to 73.7, below expectations.
- The trade balance unexpectedly widened in December on higher oil imports.
Opportunities
- The economic recovery is still intact but looks more fragile now than just a couple of months ago, which likely keeps the Fed on hold for some time.
Threats
- If one of the Euro countries were to seriously threaten default, the whole Euro currency system comes into question and threatens global financial stability
