The Economy and Bond Market Radar (April 30, 2012)
Treasuries were more or less unchanged for the second week in a row. U.S. economic data offered a mixed bag and the Fed essentially stayed the course with regard to monetary policy. First quarter GDP was released on Friday and the economy grew 2.2 percent, modestly below estimates. The key takeaway from the report is that the economy is not strong enough for the Fed to seriously consider shifting policy but it is weak enough to keep the possibility of additional QE or other stimulative measures alive.
Strengths
- The housing market continues to show signs of life as new home sales and pending home sales trend higher. In addition, months of supply of new homes has fallen to 5.3 months, back to 2006 levels.
- The HSBC China flash PMI index improved to 49.1, still indicating contraction but moving in the right direction and rising for the fourth month in a row.
- With the economy still showing tepid growth, the Fed will remain accommodating.
Weaknesses
- The U.K. economy contracted by 0.2 percent in the first quarter and is now technically back in recession.
- Weekly initial jobless claims remain elevated at 388,000 this week, continuing the recent trend of higher readings.
- Consumer confidence indicators ticked lower in April even as gasoline prices fell.
Opportunity
- After a disappointing first quarter GDP result, the Chinese are likely to ease monetary policy as soon as this quarter.
Threat
- Rising oil and gasoline prices combined with liquidity implications of global easing, led by Europe, may raise the prospect of a reappearance of higher inflation going forward.
