The Economy and Bond Market Cheat Sheet (January 17, 2011)
U.S. Treasuries were virtually unchanged this week as mixed economic data and good treasury auctions kept yields in line with last week’s close. The chart below shows the Consumer Price Index (CPI) which rose 1.5 percent year-over-year in December. Inflation remains muted and implies the Fed is unlikely to change course in the near future, awaiting an uptick in employment growth.
Strengths
- Industrial production for December rose more than expected, along with a surprising increase in capacity utilization.
- China auto sales rose 17.9 percent in December to 1.7 million units. Demand remains robust in many emerging market economies as incomes rise and the middle class expands.
- The Euro rose sharply this week as successful bond auctions in Spain, Italy and Portugal calmed fears of further government intervention.
Weaknesses
- Initial jobless claims bounced back to 445,000 this week, hitting a two-month high and dampening expectations for better job growth.
- Crude oil prices hit the highest level in two years. Corn and soybeans also rose to the highest level in more than two years as commodity prices continue to climb.
- State tax increases and budget-cutting made headlines this week in California and Illinois. While painful in the short-term, adjustments need to be made to ensure long-term viability.
Opportunities
- The rise in yield on the 10-year Treasury since 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.
