The Economy and Bond Market Cheat Sheet (March 28, 2011)
Treasury bond yields rose this week as investors embraced risk once again as stocks rose and global macro concerns were pushed to the side. At the end of the week, Philadelphia Federal Reserve President Charles Plosser proposed having a detailed plan to withdraw monetary stimulus and increase interest rates to 2.5 percent in the next twelve months as the economy continues to improve.
While the economy is showings signs of recovering, that is still not the case for the housing sector. New home sales fell to a record low and existing home sales and prices have also been weak. This is a tightrope the Fed will have to walk as they consider exiting from the current loose monetary policy.
Strengths
- Initial jobless claims remained in a general downtrend, which is a potential indication of hiring and pick-up in the economy.
- The Markit euro-zone composite purchasing managers index for the service sector rose in March and hit the highest level since 2007.
Weaknesses
- The housing sector remains very weak and the prognosis for 2011 appears grim.
- Fed officials were active this week, along with Philadelphia Fed President Plosserâs comments above, Dallas Fed President Richard Fisher indicated that the nationâs debt situation was at a âtipping pointâ and added that the U.S. is on track to insolvency.
- The European debt crisis has not been resolved as it appears very likely Portugal will be in need of an IMF bailout in the near future as the government could not pass additional austerity measures.
Opportunities
- In an interesting twist, higher oil prices may actually act as a deflationary force if it materially slows the global economic growth.
Threats
- Central bankers around the world are already raising interest rates and it appears England and Europe are poised to do the same. This would leave the U.S. in a difficult situation defending current policy.
