The Economy and Bond Market Cheat Sheet (June 13, 2011)

The Economy and Bond Market Cheat Sheet (June 13, 2011)

U.S. Treasuries rallied modestly this week as the economic outlook remains cloudy and concerns continue to build on growth prospects for the second half of 2011.

After a disappointing employment report last week, the weekly initial jobless claims data did nothing to inspire confidence. After showing steady improvement for roughly six months, the trend in initial jobless claims has been in an uptrend for the past three months and indicates a weak job market will likely persist.

Strengths

• Mortgage rates continued to fall, hitting the lowest levels of 2011, at 4.49 percent.
• China, the world’s largest auto market, announced a “cash for clunkers” program offering up to $2,800 for old vehicles to boost sales.
• The trade deficit unexpectedly fell by 6.7 percent, which should be a positive for second quarter GDP growth, but much of that improvement came from disruptions from Japan.

Weaknesses

• China auto sales fell 3 percent in May on a year-over-year basis.
• Import prices unexpectedly rose 0.2 percent in May. On a year-over-year basis import prices have risen 12.5 percent.
• In a recent survey, 43 percent of Americans believed the U.S. was in a recession or depression.

Opportunities

• The Fed may be forced into another round of quantitative easing if employment and the economy do not improve soon. This is not a consensus and the market is applying low odds of this occurring, but if it were to come to pass the fixed income markets would likely rally.

Threats

• Another Greek bailout appears inevitable and other bailouts are likely to follow, increasing the eventual risk of default and potentially threatening the global banking system.