The Economy and Bond Market Cheat Sheet (July 4, 2011)
The yield on the 10-year U.S. Treasury note increased 33 basis points this week to a yield of 3.19 percent. This was likely due to some money moving from fixed income to equities as the “risk-on trade” reasserted itself following the Greek parliament’s approval of detailed austerity and privatization measures. The graph below shows the yield on the 10-year U.S. Treasury Note over the last several years.
Strengths
- The Institute of Supply Management’s Index rose to 55.3 in June from 53.5 in May, above the consensus estimate of 52.0.
- Pending sales of U.S. existing homes increased 8.2 percent in May from April levels, besting the 3.0 percent consensus.
- The Chicago Purchasing Managers Index rose to 61.1 in June from 56.6 in May, beating the consensus which called for a drop to 54. Figures greater than 50 signal expansion.
Weaknesses
- The S&P Case-Shiller 20-City Index of home prices declined 3.96 percent year-over-year in April, the largest year-over-year drop in 17 months, but only slightly worse than the -3.95 percent consensus estimate. Month-over-month, the index declined 0.09 percent in April, slightly better than the -0.20 percent consensus.
- The Conference Board Consumer Confidence Index dropped to a seven-month low of 58.5 in June, down from a revised 61.7 in May. The consensus estimate was 61.0.
- Personal consumption expenditures were unchanged in May compared to April, the first failure to rise month-over-month since June 2010. Consensus was a 0.1 percent increase. Inflation-adjusted spending dipped 0.1 percent for a second straight month.
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.
