The Economy and Bond Market
Bond yields were mostly higher this week as Treasury bonds reacted to generally better economic data but a Treasury auction scheduled to sell $129 billion in debt looms next week.
The chart shows the Conference Board’s Index of Leading Economic Indicators which is indicating the strongest economic outlook in more than 20 years. The swiftness of the move is very impressive and implies strong economic conditions in the months ahead.
Strengths
- Conference Board’s Index of Leading Economic Indicators rose 1.4 percent in March and February’s data was revised higher.
- Existing home sales rose 6.8 percent in March, slightly ahead of expectations. Housing data has shown some stabilization in recent months and while it may not provide a boost, at least it appears to have stopped being a drag.
- Core producer prices rose a very modest 0.1 percent in March and only 0.9 percent on a year-over-year basis.
- March new home sales rose 26.9 percent from February to an annual pace of 410,000, substantially exceeding the consensus forecast of 325,000. The sales level was aided by buyers seeking to qualify for the tax credit before it expires at the end of April.
- Orders for durable goods excluding transportation rose by 2.8 percent in March from February. The consensus figure was 0.7 percent. Total orders for durable goods in March decreased by 1.3 percent due to a drop in demand for commercial aircraft.
Weaknesses
- Greece is in the news on a daily basis and the news hasn’t been good. Greece’s budget deficit will be revised higher due to uncertainties in previously reported economic data. Moody’s also downgraded the country’s credit rating citing recent difficulties in sorting out an acceptable aid package.
- China’s government enacted additional curbs on home purchases and consumer lending while forcing banks to increase provisions for bad loans.
- Weekly initial jobless claims fell modestly for the week but remain stubbornly high and appear somewhat contradictory to recent strong retail sales data.
Opportunities
- 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.
