The Economy and Bond Market
Treasury bonds rallied this week on mixed economic news. Bonds appeared to be reacting to stocks, trading inversely this week driven largely by global macro concerns.
Economic data was mixed this week as second quarter GDP disappointed a little while housing data was a little better than expected. An interesting data point out of Europe this week was the European Commission Economic Sentiment Indicator for the Eurozone which reached the highest level in more than two years. This is counter intuitive given the ongoing European financial crisis but the weaker Euro has boosted exports and German unemployment has now fallen for 13 consecutive months, so maybe things arenāt as bad as they seem.
Strengths
- European confidence remains surprisingly strong and is an interesting counter point to all the recent bad news.
- The S&P/CaseShiller Composite 20 Home Price Index rose a better than expected 4.6 percent. At the same time Freddie Mac reported that mortgage rates hit another record low of 4.54 percent.
- The Chicago Purchasing Managers Index unexpectedly rose, indicating that manufacturing activity remains strong.
Weaknesses
- Second quarter GDP was somewhat disappointing, expanding at a modest 2.4 percent.
- Durable Goods orders for June declined one percent, well below expectations of a one percent gain.
- The Fedās Beige Book report highlighted the slowing pace of economic activity in several areas of the country.
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.
