The Economy and Bond Market Radar (August 6, 2012)
Treasury yields were little changed this week as a tug of war continues between global central bankers and economic data. This week was all about the Fed and ECB announcements, which came in with a bang last week but went out with a whimper this week.Ā Neither central bank took action and, once again, tried to reassure the markets with words not action. Global economic data remains weak as can be seen in the JPM Global PMI chart below, which indicates a global contraction in manufacturing. Tempering this news was a better than expected employment report on Friday, potentially causing policy action indecision from the Fed.
Strengths
- July nonfarm payrolls grew 163,000 vs. the 100,000 that was expected and was the best showing since February.
- Retail sales posted surprising strength in July as same-store sales rose 4.4 percent.
- Consumer confidence unexpectedly bounced back in July, showing greater optimism about short-term business and employment prospects.
Weaknesses
- ISMās July manufacturing index remained in contraction territory for the second month in a row.
- The Fed failed to take any action this week after it was widely viewed that the Fed planted those seeds in a widely disseminated story last week.
- The ECB also failed to follow through with any action and possibly lost some credibility with investors. The market has become used to a lot of talk from European officials but when the head of the Central Bank promises to do whatever it takes to save the euro and then is unable to articulate exactly what that entails, it raises credibility issues.
Opportunity
- The Fed and ECB are still talking about additional monetary stimulus and it may happen in the near future. Interest rates are likely to remain very low for the foreseeable future.
Threat
- Europe remains a wildcard with the markets shifting focus on a weekly basis.
- China also remains somewhat of a wildcard as the economy has slowed and officials appear in no hurry to take decisive action.
