The Economy and Bond Market Radar (July 16, 2012)
Treasury yields headed lower again this week but not dramatically so. The minutes from the June Federal Open Market Committee meeting were released this week and indicate that Fed members remain divided on an additional round of quantitative easing (QE). In the past few years bonds have tended to rally into the QE announcement and sell off when announced as expectations are for the easing to boost the economy and financial assets. There was little in the way of real market moving economic data released this week in the U.S. but China released second quarter GDP results showing a deceleration to 7.6 percent on a year-over-year basis. This was the slowest growth since the financial crisis but is far from the âhard landingâ that many were expecting. Treasury yields moved higher on Friday and the stock market rallied, in what was likely a âreliefâ rally for stocks.
Strengths
- We did get some inflation data this week with import prices and the producer price index; both continue to show a benign inflation environment.
- Brazil and South Korea cut interest rates this week, following the coordinated actions last week from the ECB, Bank of England and the Bank of China.
- Consumer credit hit a five-month high in May as the consumer appears to be more comfortable and banks are lending.
Weaknesses
- Chinese imports slowed dramatically in June to 6.3 percent, well below estimates. This raises concerns about the depth of the slowdown in China.
- Japanese core machinery orders plummeted 14.8 percent in May, dramatically below estimates.
- Quarterly earnings reports will pick up sharply next week but we had many companies warn this week that the economy is weakening. This was particularly true in technology and industrials.
Opportunity
- The Fed reaffirmed its commitment to an ultra low interest rate policy through 2014 and additional monetary easing is possible in the near future.
Threat
- Europe remains a wildcard with the markets shifting focus on a weekly basis.
