The Economy and Bond Market Cheat Sheet (June 20, 2011)
The yield on the 10-year U.S. Treasury note declined 3 basis points this week to end at 2.94 percent.
A fixed-income research report from RBC Capital Markets provided a positive note for municipal bonds, pointing out that the May 2011 employment data included a 30,000 reduction in state and local government employment for the month. The report states that general local government employment (which excludes education jobs) is back to mid-2006 levels, and state general government employment is at levels last seen in January 1999. The report notes that, when analyzed in terms of employees per one thousand population, state general government employment is now about 8.7 per 1,000, a figure which has not been this low since 1976. The report takes issue with “the glib pronouncements in the media about the precarious position of municipal credits.”
The graph below shows the producer price index for the U.S. on a year-over-year basis, not seasonally-adjusted. The last data point for May 2011 shows a rise of 7.3 percent, the fastest rise since September 2008. Excluding food and energy, the year-over-year rise was 2.1 percent.
Strengths
- Initial jobless claims declined by 16,000 to 414,000 in the week ended June 11, below the 420,000 consensus.
- Housing starts in May were at an annual pace of 560,000, above the 545,000 median forecast. Building permits were 612,000, above the 557,000 consensus.
- Retail sales fell 0.2 percent in May from April, less than the 0.5 percent decrease in the forecast.
- The Conference Board Index of Leading Economic Indicators rose 0.8 percent in May. Economists had forecast a 0.3 percent gain.
- The Mortgage Bankers Association’s index of mortgage applications increased 13 percent in the week ended June 10 from the prior week. This was the largest percentage gain since the week of March 4.
Weaknesses
- Wholesale costs in the U.S. rose more than forecast in May. The Producer Price Index rose 0.2 percent month-over-month, more than the 0.1 percent forecast, and it rose 7.3 percent year-over-year compared to the 6.8 percent consensus. Excluding food and energy, the index rose 2.1 percent year-over-year, in line with the forecast.
- The consumer price index in the U.S. rose more than forecast in May, up 0.2 percent month-over-month versus a forecast of up 0.1 percent. It was up 3.6 percent year-over-year in May compared to the 3.4 percent consensus. Excluding food and energy, it gained 1.5 percent year-over-year versus a 1.4 percent forecast.
- The University of Michigan Consumer Sentiment Index decreased to 71.8 in June from 74.3 in May, and it was below the consensus of 74.
- The Federal Reserve Bank of New York’s general economic index dropped to minus 7.8 in June, the lowest level since November. The forecast was for a positive 12.0.
- The Federal Reserve Bank of Philadelphia’s general economic index fell to minus 7.7 in June from 3.9 in May. Readings less than zero signal contraction. The median forecast was 7.
- The National Association of Homebuilders sentiment index for June fell to 13 from 16 in May. The consensus was 16. Readings below 50 mean more respondents said conditions were poor.
Opportunities
- The Fed may be forced into another round of quantitative easing if employment and the economy do not improve soon. This is not consensus and the market is applying low odds of this occurring, but if it were to come to pass, the fixed income markets would likely rally from here.
Threats
- Another Greek bailout appears inevitable and others are likely to follow which increases the eventual risk of default and is a potential threat to the global banking system.
