The Economy and Bond Market Diary (July 5, 2010)
Treasury bonds rallied again this week sending long-term yields lower by about 14 basis points. Weak economic data has been the driver behind the rally in Treasuries for the past month or so and that trend continued this week.
Consumer confidence unexpectedly dropped almost 10 points, driven by concerns surrounding unemployment. The consumer confidence report was followed by a weak employment report, showing a loss of 125,000 jobs in June. The unemployment rate fell to 9.5 percent but much of that was driven by seasonal adjustments related to the drop in the labor force. This means the pool of unemployed just got smaller, as opposed to actual jobs being created.
Strengths
- We're currently in a dismal period for housing but there are a couple of bright spots. The Case-Shiller 20-City Home Price Index rose 0.4 percent in April and mortgage rates hit a new record low of 4.58 percent, helping affordability.
- Retail same store sales rose 2.1 percent last week, according to the ICSC-Goldman Sachs Index. That was the sharpest in almost three months.
- Large manufactures in Japan were more confident and see improving conditions during the second quarter, according to the Tankan survey.
Weaknesses
- The unemployment rate fell but the economy shed 125,000 jobs in June as Census workers began looking for work again.
- Consumer confidence fell sharply, confirming the fragile nature of the economic recovery.
- The ISM's Manufacturing Index fell more than expected confirming a global trend of slowing in the manufacturing sector. While still positive on an absolute basis, the rate of change has turned negative and this often indicates an inflection point in the economy.
Opportunities
- Inflation is unlikely to be a problem for some time and this gives central bankers and other policy makers around the world room for expansive policies.
Threats
- The risk of austerity measures going too far and significantly diminishing economic growth is a real risk.
