The Economy and Bond Market Radar (May 28, 2012)
Treasury yields were little changed as mixed economic data here in the U.S. and lots of back and forth speculation in Europe led to an overall muted reaction. New home sales were a bright spot and as can be seen in the chart below, have been steadily trending high since last summer. A similar pattern is taking place in the existing home market and real market recovery appears to be underway.
Strengths
- The University of Michigan Confidence Index hit the highest level since October 2007, citing lower gasoline prices.
- April new home sales rose 3.3 percent, beating expectations.
- Existing home sales grew 3.4 percent in April and the median priced jumped 7.6 percent.
Weaknesses
- Durable goods orders in April were weak, with “core” capital goods orders falling 1.9 percent, the third decline in four months.
- HSBC’s flash Purchasing Managers’ Index (PMI) for China fell to 48.7 in May and disappointed hopes for a rebound.
- Markit’s eurozone PMI told a similar story as this indicator fell to the lowest level in nearly three years.
Opportunity
- Bonds continue to grind higher and appear to be forecasting benign inflation and slow growth.
- The Federal Reserve appears willing to increase monetary accommodation if necessary, which would be a boost to the bond market.
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.
