The Economy and Bond Market Cheat Sheet (May 2, 2011)
Treasury bonds rallied for the third week in a row, sending yields lower across the maturity spectrum. The bond market is reacting to disappointing economic data such as weak first quarter GDP results and the initial jobless claims data shown in the chart below. Federal Reserve Chairman Bernanke was also a factor this week as he held the first ever press conference after a Federal Open Market Committee (FOMC) meeting and reiterated that the Fedâs position has not changed, inflation is transitory and the Fed will effectively provide support to the economy until growth appears sustainable and employment has improved. It was a dovish statement and the market reacted accordingly.
Strengths
- New home sales rose 11.1 percent in March from near-record-low levels.
- Consumer confidence rose, beating expectations even as gasoline prices neared $4 a gallon.
- Durable goods orders rose 2.5 percent in March, ahead of expectations, and February data was revised sharply higher.
Weaknesses
- First quarter GDP rose an anemic 1.8 percent, down from 3.1 percent in the fourth quarter.
- Initial jobless claims rose to 429,000 and are clearly trending higher after bottoming in late February.
- The Bank of Japan said that Japanâs economy will likely fall into a recession due to the recent natural disasters and nuclear catastrophe.
Opportunities
- In an interesting twist, higher oil prices may actually act as a deflationary force if they materially slow the global economic growth.
Threats
- Budget cuts and austerity measures in Europe and the U.S. are necessary evils but will likely be a considerable drag on global growth.
