The Economy and Bond Market Cheat Sheet (April 11, 2011)

The Economy and Bond Market Cheat Sheet (April 11, 2011)

Treasury bond yields moved higher this week as higher oil prices raised inflation concerns. Combined with the first rate hike from the European Central Bank (ECB) since 2008, this fueled concerns that the Fed would need to respond sooner, rather than later.

In addition to higher rates in Europe, the People’s Bank of China (PBOC) raised rates for the fourth time in about six months. While the U.S. has held out, the rest of the world has been steadily raising interest rates and with the ECB’s move this week it adds even more pressure on the Fed to act.

Strengths

• Retailer’s same store sales rose 2.2 percent in March, well ahead of expectations and somewhat surprising given rapidly rising gasoline prices.
• Initial jobless claims fell to 382,000 last week and are slowly grinding lower.
• German factory orders rose 2.4 percent in February.

Weaknesses

• The ECB raised interest rates by 25 basis points this week, which may be the first of many increases driven by elevated levels of inflation.
• China again raised interest rates as it tries to tame inflation and engineer a soft landing for the economy.
• Gasoline demand fell 3.6 percent on a year-over-year basis as higher prices are crimping demand.

Opportunities

• In an interesting twist, higher oil prices may actually act as a deflationary force if they materially slow global economic growth.

Threats

• Budget cuts and austerity measures in Europe and the U.S. are necessary “evils” but will likely be a considerable drag on global growth.