The Economy and Treasury Market Cheat Sheet (February 22, 2011)
Treasury bonds rallied this week in an apparent flight to safety with Mideast tensions continuing to fester. The chart below illustrates what is commonly known as the “Philly Fed Index” which reports manufacturing activity in the Philadelphia region, which includes portions of Pennsylvania, New Jersey and Delaware. The index rose to the highest level since 2004 and indicates significant expansion in manufacturing in this region. Based on this data point, it definitely appears the economy is moving in the right direction.
Strengths
- Housing starts rose a very strong 14.6 percent in January and while the growth came from multi-family starts, the significance of which some analysts downplayed, it remains a step in the right direction.
- Chinese auto sales rose 13.8 percent year-over-year to 1.89 million units, a new monthly record.
- The Conference Board’s index of leading economic indicators rose for the seventh straight month.
Weaknesses
- China increased the required reserve ratio for large depository institutions for the fifth time in just the past few months in an attempt to slow the economy.
- Global inflation pressures continue to build with China at 4.9 percent and the UK at 4 percent. Here in the U.S., import prices, the producer price index (PPI) and the consumer price index (CPI) all rose faster than expected.
- Retail gasoline prices hit a 28-month high of $3.13 per gallon.
Opportunities
- Economic growth remains uneven, and with Treasury yields higher than the levels earlier this year, it may offer an attractive entry point for tactical 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.
