The Economy and Bond Market Cheat Sheet (June 27, 2011)
Bond yields continued to fall this week as concerns surrounding the global economy continue to mount. Three key events unfolded late in the week that appear to be a coordinated global effort to jump start the economy. The EU and Greece have apparently come to an agreement to continue to provide funding to Greece in exchange for additional austerity steps by Greece. The International Energy Agency (IEA) announced the release of 60 million barrels of oil from strategic reserves; it was a surprise move and on the surface is oddly timed as oil peaked in early May. Finally, Chinese Premier Wen Jiabao stated that China’s efforts to curb inflation has worked and inflation is expected to slow, which implies China’s tightening measures are over for the time being. The chart below highlights initial jobless claims, which indicates economic growth and job creation has stalled. Economic data has generally deteriorated in recent months and pressure is on governments to implement additional policies to spur the global economy
Strengths
- Existing home prices in China moderated in May, one of the key factors allowing the government to possibly end its tightening program.
- The IEA announced it will release 60 million barrels of oil, immediately impacting oil prices, which should provide a lift to the consumer.
- Durable goods orders for May rose 1.9 percent, beating expectations and bouncing back from a decline in April.
Weaknesses
- Initial jobless claims rose from 15,000 to 429,000 in the week ended June 18, indicating no improvement in the labor market.
- New home sales fell 2.1 percent in May and existing home sales fell 3.8 percent, hitting a six-month low.
- The Fed revised down their economic growth forecast for 2011 as the economy has been surprisingly slow.
Opportunities
- The Fed may be forced into another round of quantitative easing if employment and the economy do not improve soon. This is not 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 from here.
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.
