The Economy and Bond Market Radar (January 23, 2012)
Long-term treasury yields rose sharply as once again the schizophrenic market gyrates up one week and down the next, which is what we have experienced since mid-November.
Yields rose throughout the week as we appear to be in another “risk on” mode where risky assets rise and safe assets fall.
Economic data generally met expectations this week as inflation continued to slow on a year-over-year basis and housing data was generally in line with forecasts. The big surprise of the week was initial jobless claims, which hit the lowest levels since 2008. This number is often viewed as a leading indicator, which bodes well for the economy going forward.
Strengths
- The weekly initial jobless claims are indicating the economy is picking up steam.
- Both the Producer Price Index (PPI) and Consumer Price Index (CPI) came in below expectations, giving the Fed plenty of room to maneuver if it were to decide additional stimulus is needed.
- China reported fourth quarter GDP which rose 8.9 percent and beat expectations. The Chinese hard landing many pundits were worried about has yet to materialize and government policy has already shifted to an easing bias, likely resulting in a reacceleration in the second half of 2012.
Weaknesses
- Overnight deposits with the ECB hit another record high at roughly $685 billion as banks are still unwilling to lend to each other in the overnight interbank market. This indicates significant lack of confidence in the European banking sector and is at odds with the equity performance of many European banks of late.
- Greece has yet to come to an agreement with private creditors on the level of haircut that will be taken. This remains an overhang on the financial markets.
- Industrial production rose 0.4 percent but came in shy of expectations.
Opportunities
- The Fed is expected to release its Fed funds rate forecast at the conclusion of the Wednesday Federal Open Market Committee (FOMC) meeting. This new openness is welcome but depending on the detail and how well the information is explained, will ultimately determine how the market takes this new news.
Threats
- The situation in Europe remains extremely fluid and negative news is almost expected at this point. Unfortunately it is politically driven and difficult to predict outcomes and ramifications.
