The Economy and Bond Market Cheat Sheet (February 7, 2011)
U.S. Treasuries sold off this week as the 10-year Treasury hit the highest level since May. Yields rose steadily all week on the back of stronger-than-expected economic data. The chart below shows the ISM Manufacturing Index hitting the highest level since May 2004. On Friday, it was reported that the unemployment rate fell to 9 percent. The bond market sold off on the news, though the underlying data was mixed at best.
Strengths
- The ISM Manufacturing Index hit the highest level in more than six years. This data reinforces the strong manufacturing data being reported around the world.
- Retailers posted a strong January. This is a positive since many raised concerns after a weak period between Christmas and the New Year’s holiday.
- January auto sales were also strong with major automakers posting a 17 percent increase.
Weaknesses
- Surging global food prices were one of the key drivers behind the turbulence experienced in the Middle East and North Africa.
- The unemployment rate dropped by 0.5 percent due to a large decline in the labor force. However, the economy only created 36,000 jobs, not nearly enough for a sustainable recovery.
- Eurozone inflation hit 2.4 percent and is at the highest level since 2008. This puts the European Central Bank in a difficult position.
Opportunities
- Economic growth remains uneven and with this week’s rise in Treasury yields it may offer an attractive entry point for bond buyers.
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.
