The Economy and Bond Market Diary (June 21, 2010)
Treasury bond yields were little changed again this week, with most issues seeing slight yield decreases. Even with a fair amount of economic data released this week, it still appears that the market is more focused on global macro issues.
One area of particular concern for the economy is the employment situation. U.S. initial jobless claims showed steady improvement through most of 2009, but this positive momentum has recently stalled out. Unless the situation improves soon, this implies a tough road for job growth and other fundamental improvement for the economy.
Strengths
- Inflation data remains constructive as both PPI and CPI fell modestly in May. With low inflation likely at least through the end of the year, the Federal Reserve has no pressure to raise interest rates.
- Industrial production rose 1.2 percent in May and climbed 7.6 percent on a year-over-year basis, a new cycle high.
- The Conference Board’s Leading Index rose 0.4 percent in May, returning to growth after being unchanged in April.
Weaknesses
- Initial jobless claims are a big concern and need to improve soon to indicate the recovery remains intact.
- Housing starts fell 10 percent in May after the expiration of the home buyer tax credit. Single-family housing starts fell the most since 1991, dropping more than 17 percent.
- Global austerity measures are in vogue, with fiscal restraint and higher taxes a likely drag on global growth.
Opportunities
- Inflation is unlikely to be a problem for some time and this gives central bankers and other policymakers around the world room for expansive policies.
Threats
- The possibility of austerity measures going too far and significantly diminishing economic growth is a real risk.
