The Economy and Bond Market Cheat Sheet (August 2, 2011)
Treasury bond yields fell across the yield curve as the market reacted to weak economic data. Second quarter GDP grew 1.3 percent and first quarter GDP was revised down to a paltry 0.4 percent. With the exception of very short term treasury bills due in the next few weeks the market took all the debt ceiling/default talk in stride and focused on longer term economic fundamentals.
The chart below shows the deterioration in the University of Michigan Survey of Consumer Confidence which has been telegraphing how weak the economy is.
Strengths
- On Friday, bonds rallied sharply on the weak GDP report. The current environment puts considerable pressure on the Fed to maintain its ultra easy monetary policies.
- Initial jobless claims unexpectedly fell below 400,000 for the first time since early April.
- Housing data was mixed this week but June pending home sales unexpectedly rose 2.4 percent.
Weaknesses
- Durable goods orders fell 2.1 percent in June and many industrial companies have reported disappointing results in recent weeks.
- Moody’s stated that odds are “virtually 100 percent” that Greece will be in default due to the recent European Union bailout package.
- India raised interest rates by 50 basis points in a sign that emerging economies are still battling inflation.
Opportunities
- Federal Reserve Chairman Bernanke told Congress the central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling from here.
Threats
- The U.S. debt ceiling issue needs to be resolved soon as unintended consequences could be large.
