Economy and Bond Market Diary
Treasury bond yields were mixed this week, with short-term yields rising modestly while long term yields were falling by about the same magnitude.
The Fed left monetary policy unchanged and hinted at more of the same. Inflation data was also tame and gives the Fed plenty of room to maneuver (see chart below), at least in the near term. Looming Treasury supply was the only significant obstacle for the market to deal with.
Strengths
- Both PPI and CPI were released this week and indicated pricing pressures are currently muted.
- The Fed left interest rates unchanged and remained committed to keeping them there for an “extended period.”
- In an attempt to stimulate their economy, the Bank of Japan doubled the funds available to banks for three month loans.
Weaknesses
- India raised interest rates on Friday and Australia committed to continue on its path of higher interest rates. With inflation concerns in China and India we are experiencing a bifurcation in policy actions by global central banks.
- Moody’s commented that the United States and the United Kingdom are most at risk of a downgrade among AAA rated countries.
- Housing starts fell 5.9 percent in February. The housing market has seen some modest improvement but still faces significant headwinds.
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, probably 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.
