The Economy and Bond Market Diary (July 19, 2010)
Treasury bonds rallied this week as the low inflation theme was underscored with very benign inflation data. The 10-year Treasury closed the week below 3 percent and the 2-year Treasury hit a new low.
Economic data was also weak overall, making the near-term inflation story less viable. The chart below shows that the University of Michigan Consumer Confidence Survey fell sharply, reflecting pessimism regarding employment and income growth, and it suggests expectations of sluggish consumer spending going forward.
Strengths
- Industrial production continued to move higher, rising 0.1 percent. On a year-over-year basis, industrial production continues to accelerate. It has risen 8.2 percent and shows continued expansion in the manufacturing sector.
- Initial jobless claims for the week ended July 9 decreased by 29,000 to 429,000, the lowest level since August 2008.
- Both the Consumer Price Index and the Producer Price Index indicated benign inflation this week, which allows the Federal Reserve plenty of room to maneuver.
Weaknesses
- The University of Michigan Consumer Confidence Survey hit the lowest level since August 2009, highlighting the fragile nature of the economic recovery.
- June retail sales fell 0.5 percent, confirming the weak confidence data.
- China’s GDP slowed to 10.3 percent in the second quarter, below expectations and indicating that recent tightening moves by the government are already having an impact.
Opportunities
- Inflation is unlikely to be a problem for some time. This gives central bankers and other policymakers 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.
