The Economy and Bond Market Cheat Sheet (August 8, 2011)
Treasury bond yields fell sharply this week with weak economic data and rapidly escalating fears surrounding Europe’s never ending debt crisis. The week began with what appeared to be calming news as a debt ceiling deal was finally agreed to. The market quickly shrugged that off and focused on the rapidly deteriorating ISM manufacturing data and concerns about a possible need for additional European bailouts which would have a significant impact on the global financial sector.
Bonds rallied dramatically this week in response to the above-mentioned items as odds of a double-dip recession have seemingly increased significantly and at the same time, worries about inflation and a possible tightening move by the Federal Reserve have been pushed far into the future.
Strengths
- Bonds rallied sharply this week on weak economic data and rapidly escalating fears surrounding Europe’s never-ending debt crisis.
- Nonfarm payrolls for July rose 117,000. This better than expected report on Friday dampened some of the enthusiasm that existed for most of the week in the fixed income markets.
- Mortgage rates fell to the lowest levels since November 2010.
Weaknesses
- A crisis of confidence in U.S. and European leaders appears to have been a significant reason for the dramatic fall of many risky assets across the globe.
- The ISM Manufacturing Index fell sharply and came in well below expectations, indicating a high risk of contraction in manufacturing.
- The ISM Non-Manufacturing Index also disappointed and raised the risk of a broad based slowdown.
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.
Threats
- Confidence needs to be restored to the financial markets or further volatility can be expected.
