The Economy and Bond Market Cheat Sheet (June 6, 2011)
U.S. Treasuries rallied again this week as weak economic data, a weak stock market and lots of headline noise out of Europe pushed yields lower.
Employment data was very disappointing as the unemployment rate ticked higher to 9.1 percent as a meager 54,000 jobs were created in May. The prior two months were revised lower by 39,000, so effectively the economy didn’t really create any jobs last month. This is a very disappointing outcome and highlights the difficult decisions that lie ahead for the Fed as quantitative easing comes to an end this month with the economy stuck in neutral.
Strengths
- Mortgage rates continued to fall, hitting the lowest levels of 2011 at 4.55 percent.
- The ISM Non-Manufacturing Index rose more than expected and bounced back from a weak report last month.
Weaknesses
- Unemployment hit 9.1 percent and the economy continues to struggle to create jobs.
- Retailers reported disappointing results in May with many stores missing expectations. Consumer confidence also fell, coming in much weaker than expected and hitting the lowest levels of the year.
- The ISM manufacturing index fell sharply and missed expectations by a wide margin. This has been a global trend and this reading just reinforces the idea of a global slowdown or “soft patch.”
Opportunities
- The Fed may be forced into another round of quantitative easing if employment and the economy do not improve soon. This is not the consensus and the market is applying low odds of this occurring, but such an outcome would likely cause fixed income markets to rally.
Threats
- Another Greek bailout appears inevitable and others are likely to follow, which increases the eventual risk of default and is a potential threat to the global banking system.
