The Economy and Bond Market Radar (July 9, 2012)
Treasury yields headed lower this week on disappointing economic reports and global central bank easing. Two key economic data points bookended the week, with a very weak reading from the ISM Manufacturing Index on Monday, followed by a subpar employment report on Friday. On Thursday we had what appeared to be coordinated global central bank policy easing with the ECB and the Bank of China cutting interest rates by 25 basis points, along with the Bank of England adding ?50 billion to their quantitative easing program. As can be seen in the chart below, the yield on the 10-year treasury fell to the lowest level in more than a month.
Strengths
- Economic data is weak globally, forcing central banks to act which is sparking a bond rally and pushing down yields.
- Domestic auto sales remain a bright spot for the economy with GM, Ford and Chrysler all posting strong sales growth in June.
- Factory orders for May rose 0.7 percent, beating expectations.
Weaknesses
- June nonfarm payrolls were weaker than expected, rising by a meager 80,000, little changed over the past few months.
- The ISM Manufacturing Index fell to the lowest level since July 2009 and indicated contracting manufacturing in June.
- European bond yields remain elevated even after central bank intervention and the EU summit the week before.
Opportunity
- The Federal Reserve reaffirmed its commitment to an ultra-low interest rate policy through 2014 and additional monetary easing is possible in the near future.
Threat
- Europe remains a wildcard with the markets shifting focus on a weekly basis.
- China has obviously become more concerned about the economy and has eased twice in the past month.
