The Economy and Bond Market Cheat Sheet (February 28, 2011)
Treasury bonds rallied this week as safe-haven buying was in vogue with tensions continuing to fester in the Middle East and North Africa. Economic data was mixed this week. One area that continues to struggle to get off the mat is housing. The chart below shows new home sales for January remained near the lows hit last August.
Strengths
- Consumer confidence rose to a three-year high as consumer optimism on the future rose.
- Initial jobless claims fell to 391,000 and offer hope that the employment situation is finally improving.
Weaknesses
- With the unrest in Libya this week, West Texas Intermediate (WTI) oil prices rose $12 and could potentially be a drag on global growth if sustained at these price levels. This can be seen almost immediately at the fuel pump.
- Housing data remains week as new home sales disappointed. Existing home prices fell 3.7 percent year-over-year and are at the lowest level since April 2002.
- Fourth quarter GDP was revised lower to 2.8 percent from 3.2 percent and adds to the feeling of anemic economic expansion.
Opportunities
- In an interesting twist, higher oil prices may actually act as a deflationary force if they materially slow global economic growth.
Threats
- In general, 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.
