The Economy and Bond Market Radar (May 7, 2012)
Treasury yields have had a slight downward bias the past couple of weeks and that trend accelerated this week as yields fell across the board. U.S. economic data continues to be a mixed bag. The unemployment report was released on Friday which was lackluster at best with non-farm payrolls growing a modest 115,000. The recent trend does not inspire a lot of confidence as can be seen in the chart below. The Federal Reserve remains in play and may enact additional quantitative easing or other stimulative policy measures if the economy does not improve.
Strengths
- The ISM Manufacturing Index rose to 54.8 in April, showing surprising strength amid weakening manufacturing data in many parts of the globe.
- The HSBC Purchasing Managers Index (PMI), which is a gauge of China manufacturing, also improved but still indicated contraction.
- Australia cut interest rates by 50 basis points as inflation expectations moved lower.
Weaknesses
- Non-farm payrolls only rose a modest 115,000 and the recent trend has been disappointing.
- April same-store sales have disappointed as the consumer appears to have slowed down after a several months of beating expectations.
- The European Central Bank indicated that additional easing is not likely.
Opportunity
- Bonds continued to grind higher and appear to be forecasting a benign inflation and slow growth.
Threat
- Europe remains a wildcard with austerity programs under pressure, creating significant uncertainty.
