The Economy and Bond Market Cheat Sheet (July 11, 2011)
Bonds reversed course this week, sending treasury yields lower for the week. A dismal employment report on Friday was the biggest driver, essentially showing the economy didn’t create any jobs during June. This report will pressure both the Obama administration as well as the Federal Reserve to consider some sort of additional fiscal or monetary stimulus.
Strengths
- Same store sales for June were better than expected, rising 7.2 percent; the one caveat is the growth was apparently driven by discounting merchandise.
- May factory orders rose 0.8 percent and can be interpreted as supportive for the manufacturing sector.
- Money supply in the U.S. expanded by $76 billion for the week of June 27, accelerating as QE2 was ending.
Weaknesses
- The June employment report was dismal as nonfarm payrolls grew a meager 18,000, well below estimates of 105,000. The prior two months were revised lower by 44,000 jobs.
- The European Central Bank raised interest rates by 25 basis points to 1.5 percent even as the region continues to struggle with bailouts, downgrades and banking solvency concerns.
- China raised interest rates by 25 basis points this week in an effort to control inflation.
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
- The Greek bailout came and went, so the market has shifted its focus to Portugal. This has been the pattern for the last year – as soon as one issue is “resolved” the market just moves on to the next “problem.” This pattern won’t stop until long-term solutions are implemented.
