The Economy and Bond Market Radar (January 16, 2012)
Long-term Treasuries rallied this week, sending yields lower as the schizophrenic market continues to gyrate up one week and down the next. This is what we’ve experienced since mid-November.
Most of the gain in Treasuries came on Friday as Standard & Poor’s (S&P) downgraded several European countries including France, Italy and Austria. The U.S. dollar and Treasuries rallied on this news, while stocks sold off.
Economic data was mixed but one outlier was the consumer credit report from the Federal Reserve, which grew by more than $20 billion in December. The 9.9 percent annualized increase is the fastest growth since November 2001. Consumer confidence and retail sales have improved over the course of the quarter but it appears a sharp reversal in consumer credit may dampen the outlook going forward.
Strengths
- The University of Michigan Confidence Index and the IBD/TIPP Economic Optimism Index both registered strong increases in January.
- The three month rate in China’s M2 money supply index has accelerated very sharply and is an indication that the government is addressing the concerns of an economic hard landing. China’s bank loans rose 14 percent in December and reinforce the idea that policymakers are taking action.
- Italian 10-year bond yields fell sharply this week as bond auctions in Europe were met with strong investor demand.
Weaknesses
- Overnight deposits with the European Central Bank (ECB) hit another record high at $591 billion as banks are still unwilling to lend to each other in the overnight interbank market. This indicates significant lack of confidence in the European banking sector.
- Weekly jobless claims rose back near the 400,000 level and are at the highest level in six weeks.
- Consumer credit surged $20 billion this week as consumers levered back up in November.
Opportunities
- Inflation data will be released next week and should confirm the declining trend in inflation. We also have housing starts and building permits which will hopefully confirm some of the recent positive data points in housing.
Threats
- The situation in Europe remains extremely fluid and negative news is almost expected at this point. Unfortunately, decisions are politically driven and it is difficult to predict outcomes and ramifications.
