The Economy and Bond Market Radar (February 20, 2012)
Treasury bond yields were modestly higher again this week as most of the yield curve shifted higher by about 2 basis points.
As the global economy continues to sputter central banks around the world are opening the monetary spigots. Japanese fourth quarter GDP fell 0.6 percent and the chart indicates that the country’s GDP is down 1 percent on a year-over-year basis, signaling the country is in a recession. Earlier this week, the Bank of Japan announced a $130 billion expansion of its quantitative easing (QE) program and implemented a 1 percent inflation target. Last week, the Bank of England expanded its QE program by $80 billion. Chinese Premier Wen Jiabao indicated policymakers will begin “fine tuning” the economy during the first quarter of 2012. This is just another way of saying the recent easing measures we’ve seen China implement will continue.
Strengths
- Initial jobless claims continue to improve, falling to the lowest levels since 2008.
- The Bank of Japan announced a $130 billion expansion of its QE program and implemented a 1 percent inflation target.
- Housing data continues to improve, with housing starts and building permits showing signs of life in January.
Weaknesses
- Retail sales were weaker than expected as higher gasoline costs crimped spending elsewhere.
- Eurozone GDP shrank 0.3 percent in the fourth quarter.
- Japanese fourth quarter GDP fell 0.6 percent.
Opportunities
- The “risk on” trade started to show a few cracks this week and a reversal of sentiment would be good for bonds.
Threats
- Coordinated global easing from the world’s central banks eventually will create inflation.
