The Economy and Bond Market Diary (5/31/2010)
Treasuries sold off this week as the market managed a modest reversal of the flight to quality trade we have experienced recently. The yield on the 30-year treasury rose by about 10 basis points this week.
May definitely had its share of negative news, whether it was the stock market, European credit crisis or the spill in the Gulf of Mexico. In spite of this, May consumer confidence rose to the highest levels in two years. This is a very interesting counterpoint to the double-dip recession crowd.
Strengths
- Consumer confidence rose to the highest levels in two years.
- U.S. M2 money supply has reaccelerated in recent weeks and the annualized four-week rate of change is up almost 19 percent. This is a very positive development for both the economy and financial markets.
- April durable goods orders rose to the highest level in three years.
Weaknesses
- On the back of the expiration of the home buyer tax credit in April, the inventory of unsold homes rose by the most in 10 years.
- In contrast to the rise in the U.S. consumer confidence index, State Street’s Investor Confidence Index dropped to the lowest since January 2009. Investor confidence in North America and Europe fell while Asian confidence rose.
- First quarter GDP was revised to 3 percent, down from the 3.2 percent prior estimate.
Opportunities
- The current environment appears similar to 2008 in many ways, although crucial differences are evident. The economy is recovering and global economic growth still looks like the most likely outcome. In addition, while some fear/risk indicators are elevated, they are nowhere near the panic levels seen during the past crisis.
Threats
- Until the European situation is resolved with some degree of certainty, the market will be at the whims of macro risk factors.
- Concerns of a full-blown credit crisis have probably diminished some but cannot be ruled out.
