The Economy and Bond Market Radar (June 25, 2012)

The Economy and Bond Market Radar (June 25, 2012)

Treasury yields rose this week in spite of the Federal Reserve’s extension of “operation twist” through the end of the year. Operation twist sells short-term treasuries to fund purchases of long-term treasuries in an effort to push down longer-term borrowing costs in the economy. The Fed also downgraded its assessment of the economy and employment prospects, so it appears the market was somewhat disappointed that the Fed didn’t do more.

One area of the economy that has shown steady improvement is the housing market. The chart below depicts building permits, which should lead actual housing starts. This indicator hit the highest level in almost four years. Single family housing starts grew 3.2 percent in May and rose for the third consecutive month.

Strengths

• Housing indicators continue to show improvement and have definitely been a bright spot for the economy this year.
• The Conference Board’s index of leading economic indicators rose more than expected. The positive surprise was driven by building permits.
• Housing prices grew 0.8 percent in April. Year-over-year prices rose 3.0 percent, which is the largest gain since October 2006.

Weaknesses

• The Philadelphia Fed manufacturing index slumped to the lowest levels since August and spooked many market participants, believing this is a precursor to weak manufacturing data.
• Weekly initial jobless claims are stuck in neutral and are indicating softness for the economy and the employment picture.
• HSBC’s Flash Purchasing Managers’ Index (PMI) for China was disappointing, indicating no near-term turnaround for the Chinese economy.

Opportunity

• The Fed reaffirmed its commitment to an ultra-low interest rate policy through 2014, with additional monetary easing is possible in the near future.

Threat

• Europe remains a wildcard with the markets shifting focus on a weekly basis.