The Economy and Bond Market Radar (June 18, 2012)
Treasuries rallied modestly this week as Spain was in the crosshairs. Events in Europe dominated the news beginning with the $125 billion Spanish bank bailout that took place over the weekend. But as can be seen in the chart below the market did not take too much solace in that outcome as Spanish bond yields moved higher this week and the market remains skeptical of the ultimate outcome. The Greek elections that take place this weekend were also talked about virtually nonstop all week and that adds an element of uncertainty as we head into the weekend. Global central bankers have said they are ready to act and provide liquidity if needed next week, which calmed the markets and reinforced the message of continued monetary policy easing.
Strengths
- Europe acted fairly decisively in addressing the Spanish bank problem, which should boost confidence in policy makers.
- U.S. consumer prices fell 0.3 percent in May and year-over-year Consumer Price Index (CPI) is now running at 1.7 percent, leaving the Fed plenty of room to ease if needed.
- Eurozone inflation also slowed in May falling to an annualized 2.4 percent in May.
Weaknesses
- May retail sales fell 0.2 percent and April’s numbers were revised lower for the first back-to-back decline in two years.
- Industrial production fell 0.1 percent in May, below expectations.
- The National Federation of Independent Business sentiment index fell in May, essentially small business optimism declined, citing uncertainty in Washington.
Opportunity
- Bonds continue to grind higher with benign inflation and slow growth.
- The Fed appears willing to increase monetary accommodation, which may come as early as next week at the Federal Open Market Committee (FOMC) meeting.
Threat
- Europe remains a wildcard with Greek elections this weekend.
