The Economy and Bond Market Cheat Sheet (August 22, 2011)
Treasury bonds rallied for the third week in a row, sending yields sharply lower. European banks remain in the headlines and were a key driver during this week’s move. Economic data continues to deteriorate as can be seen in the chart below, which depicts the Philadelphia Fed Business Outlook Survey, commonly know as the Philly Fed Index. The index tracks manufacturing in the Philadelphia region and unexpectedly plunged to the lowest levels in more than two years, back when the economy was in a recession. This raised fears that the economy may already be in recession and fueled a rally in bonds.
Strengths
- July industrial production rose a surprising 0.9 percent and bucks the recent trend of weak manufacturing data.
- Mortgage rates fell to the lowest levels in more than 50 years, falling to 4.15 percent.
- The Conference Board’s Leading Economic Indicators Index rose a greater than expected 0.5 percent in July.
Weaknesses
- Eurozone GDP rose a meager 0.2 percent (not annualized) in the second quarter, driven by weaker-than-expected results from Germany.
- Housing data remains in the doldrums with July housing starts declining, existing home sales falling and home loan applications plunging.
- July inflation data was higher than expected, while not a concern in the current environment, it must be monitored closely.
Opportunities
- With the economy weak and concerns brewing about an additional financial crisis, the Fed will remain accommodative for some time and bonds appear well supported in the current environment.
Threats
- There is a crisis of confidence in world leaders at the moment and the potential for another financial crisis is rising.
