Economy and Bond Market Highlights

The Economy and Bond Market

The yield on the 10-year U.S. Treasury Note increased by 7 basis points during the week to 3.68 percent. The entire move came on Friday after the February jobs report showed fewer job losses than expected and the unemployment rate holding steady.

U.S. manufacturing expanded in February for the seventh consecutive month. Although February’s ISM Manufacturing Index came in at 56.5, a drop from January’s 58.4 and lower than the consensus of 57.9, any reading above 50 indicates an expansion. This expansion from August thru February can be seen in the graph below.

Strengths

• The February nonfarm payroll report showed a loss of 36,000 jobs, fewer than the 68,000 than was expected. The unemployment rate for February was unchanged at 9.7 percent, better than expectations of 9.8 percent.
• As explained above, U.S. manufacturing expanded in February for the seventh consecutive month.
• Service industries in the U.S. strengthened more than anticipated. The ISM Non-manufacturing Index for February was 53.0, above the 51.0 expected and the level of 50.5 that was reported in January.
• Same-store retail sales increased for the third consecutive month in February. The International Council of Shopping Centers’ Index of 31 retailers (excludes Wal-Mart) showed a 3.7 percent same-store sales increase in February from a year earlier.
• Figures from the Commerce Department showed that personal spending rose by 0.5 percent in January over December, slightly more than the 0.4 percent expected.

Weaknesses

• Pending sales of existing homes fell 7.6 percent month-over-month in January, below expectations for a 1.0 percent increase. Poor winter weather was a contributing factor.
• Commerce Department figures showed that personal income rose month-over-month in January by 0.1 percent, less than the 0.4 percent expected.

Opportunities

• If financial markets are a good mechanism for discounting the future, the future appears relatively robust. The markets have been able to shake off bad news relatively easily recently, a good sign for the economic recovery.

Threats

• When governments around the world begin to wind down the monetary and fiscal stimulus programs put in place during the economic crisis, it will likely present a headwind for the economy.