The Economy and Bond Market Radar (February 27, 2012)
Treasury bond yields were mixed this week as the short end of the yield curve rose slightly while the long end fell by a similar amount.
Global economic data remains mixed as the February eurozone Purchasing Managers Index (PMI) fell back into contraction territory. The HSBC February “flash” PMI for China also indicated contraction. On the other hand, U.S. economic data remains positive as housing indicators continue to recover. The chart below shows existing home sales continuing to grind higher and months of supply for existing homes fell to 6.1 months, the lowest level in five years.
Strengths
- Initial jobless claims continue to point to a recovery and remain near a four-year low.
- The University of Michigan Consumer Confidence Index rose to 75.3 from 72.5 in February.
- Consumer confidence in the eurozone increased for the second month in a row.
Weaknesses
- Retailers that reported earnings this week generally gave cautious outlooks, likely driven by higher gasoline prices.
- Key global manufacturing PMIs out of the eurozone and China are indicating weakness.
- Gasoline prices have surged by about $0.40 in the past two months as oil prices continue to climb.
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 would eventually create inflation.
