The Economy and Bond Market Radar (May 14, 2012)
Treasury yields have had a slight downward bias again this week, which has become a persistent pattern over the past few weeks. With global economic data exhibiting a weak trend recently and European concerns back on the front page it is not surprising that treasuries have been rallying recently. This time last year there was considerable concern regarding rising inflation but that dynamic has completely changed. Both the import price index and the producer price index were reported this week. As the chart below shows, both are in an undeniable downtrend which validates the Federal Reserve’s policy to stay the course with easy monetary policy.
Strengths
- Consumer borrowing jumped $21.4 billion in March indicating that consumers feel comfortable enough to borrow again after several years of retrenchment.
- German industrial production jumped 2.8 percent in March, well ahead of expectations and indicating surprising strength.
- The National Federation of Independent Business small business optimism index hit a 14 month high in April.
Weaknesses
- Economic data out of China this week showed continued slowdown as industrial production and retail sales disappointed.
- Brazilian consumer prices rose 0.64 percent in April, ahead of forecast and the biggest increase in a year.
- British retail sales fell 3.3 percent in April. The U.K. economy fell into an official recession recently as first-quarter GDP fell 0.2 percent after falling 0.3 percent in the fourth quarter.
Opportunity
- Bonds continue to grind higher and appear to be forecasting a benign inflation and slow growth.
Threat
- China’s economy is slowing faster than expected and government policy makers appear comfortable with this dynamic.
- Europe remains a wildcard with austerity programs under pressure, creating significant uncertainty.
