The Economy and Bond Market Diary (August 16, 2010)

The Economy and Bond Market Diary (August 16, 2010)

Treasury bonds rallied again this week as the market refocused on the negative aspects of the global growth story. This week’s economic data points didn’t flash new threatening signals, it is basically the same story that people have been worried about for months but the market ran with it this week.

The chart shows the 10-year Treasury bond which is now at the lowest levels in more than a year and is sending an ominous message about the prospects for growth and inflation over the next 6-12 months.

The Fed also announced their intentions to maintain their quantitative easing bias by using the proceeds of maturing mortgages and Treasuries to finance additional purchases of Treasury securities and committed to keeping interest rates near zero for an extended period.

Strengths

• Mortgage rates hit a fresh new low of 4.44 percent, the lowest level since records began 39 years ago.
• Inflation remains muted with consumer prices (CPI) rising just 1.2 percent from a year ago.
• Retail sales in July bounced 0.4 percent after two consecutive monthly declines.

Weaknesses

• Initial jobless claims hit the highest levels in six months as the economy struggles to generate employment growth.
• Concerns surrounding China’s economic growth increased as industrial production fell to 13.4 percent on a year-over-year basis, slowing from 18.1 percent just four months ago.
• The trade deficit widened to almost $50 billion in June and likely slashed second quarter GDP growth to 2 percent.

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.