The Economy and Bond Market Cheat Sheet (January 3, 2011)
U.S. Treasuries rallied this week based on strong results from Wednesday's seven-year auction and generally benign economic data. The chart below shows gasoline prices have climbed steadily since September, which is unusual for this time of year. Gasoline prices north of $3 per gallon are a threat to economic growth and may offset other positive developments here in the U.S.
Strengths
- Initial jobless claims fell below 400,000 for the first time since July 2008, indicating slow but steady improvement in the job market.
- While recent storms on the east coast negatively impacted retail sales, retail sales for the month of December were likely up four percent, which would be the best showing since 2006.
- The ISM-Chicago Manufacturing Index rose to 68.6, which was the highest reading in 22 years and indicates continued expansion in the manufacturing sector.
Weaknesses
- U.S. gasoline prices rose above $3 per gallon nationally and now stand at the highest level since October 2008. Many view higher energy prices as a "tax" on the economy and a threat to growth prospects.
- The S&P/Case-Shiller Composite of 20 Home Price Index fell one percent in October, continuing a disturbing trend and increasing concerns about the potential impact on the economy. In related news, the 30-year fixed mortgage rate rose to 4.86 percent, reaching a seven-month high.
- Greek 10-year bond yields hit a new record high this week, rising above 12.5 percent.
Opportunities
- The rise in yield on the 10-year Treasury, from the October low to levels comparable to those existing in May 2010, may offer an attractive entry point for bonds.
Threats
The economy appears to be performing better than many expected and could be a threat to fixed income markets as yields move higher in response.
