The Economy and Bond Market Cheat Sheet (May 16, 2011)

The Economy and Bond Market Cheat Sheet (May 16, 2011)

The yield on the 10-year U.S.Treasury note was relatively unchanged this week, closing Friday at 3.17 percent, up two basis points for the week.

The chart below depicts year-over-year price changes on a percentage basis for the U.S Producer Price Index (PPI). The data for April 2011 shows a 6.8 percent increase as compared to the 6.5 percent forecast. The increase was driven largely by increases in food and energy. Excluding food and energy the core index rose 2.1 percent on a year-over year basis, matching the consensus forecast. As the chart shows, the index has been increasing over the past three months.

Strengths

• Retail sales in April rose 0.5 percent after a 0.9 percent gain in March. The March gain was revised up from a prior 0.4 percent gain. The April gain was slightly below the 0.6 percent consensus. April retail sales, excluding autos & gasoline, rose 0.2 percent. This is below the 0.5 percent consensus estimate.
• Initial jobless claims fell 44,000 in the week ended May 7 to 434,000 from a revised 478,000 the prior week, slightly less than the 430,000 forecast.
• Preliminary data from The University of Michigan Consumer Sentiment Index for May rose to 72.4, a three-month high. This is up from 69.8 in April and above the 70.0 consensus.
• The Mortgage Bankers Association’s Index of Mortgage Applications increased 8.2 percent in the week ended May 6, the highest level in more than a month. The group’s refinancing gauge advanced 9 percent and its purchase index rose 6.7 percent.

Weaknesses

• PPI increased 0.8 percent in April, above the 0.6 percent forecast and above the 0.7 percent gain in March. The index increased 6.8 percent year-over-year, above the 6.5 percent forecast. The core figure excluding food and energy gained 2.1 percent year-over-year, matching the consensus.
• Prices of imported goods into the U.S. rose 2.2 percent in April from March levels, above the consensus forecast of 1.8 percent. Year-over-year import prices rose11.1 percent, the biggest 12-month gain in a year.
• The Bloomberg Consumer Comfort Index decreased to minus 46.9 for the week ending May 8, from minus 46.2 the prior week. This is the lowest figure since the week of March 27.

Opportunities

• In an interesting twist, higher oil prices may actually act as a deflationary force if it materially slows 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.