The Economy and Bond Market Notebook (2010-05-10)
Treasury bond yields fell across the board this week as investors sought the relative safety of Treasuries as the Greek crisis refuses to go away. Just as in the stock market, bond market liquidity suffered this week, driving up volatility across most fixed income asset classes. An interesting exception were municipals which were very stable this week as they have very little exposure to the Greek crisis.
Last week we talked about consumer confidence hitting the highest levels since September 2008 but this week we took a step back and looked at it from a longer term perspective. The March personal income and spending report was issued this week showing spending rising 0.6 percent while income rose 0.3 percent. What struck us about these numbers was the seeming disconnect between income, spending and consumer confidence. It turns out the primary driver of the “robust” gains in income were driven by a 1.1% increase in “transfer payments”, i.e. government social benefits of one form or another. The unemployment insurance subcomponent payments rose 8.7 percent in March. The savings rate declined to 2.7 percent, the lowest since September 2008. This gets us back to the relationship to consumer confidence, excluding the lows suffered in the past 18 months or so, consumer confidence is at the lowest levels it’s been in more than 30 years and when it is government social programs driving gains in income we understand why the consumer may be wary.
Strengths
- Nonfarm payrolls rose a robust 290,000 in April, well ahead of expectations. March’s data was revised higher, showing a gain of 230,000 vs. the 162,000 originally reported.
- The ISM manufacturing index rose to the highest level in almost six years as activity levels continue to improve.
- JP Morgan’s global manufacturing index rose to the highest levels in six years confirming the trend we are witnessing in the U.S.
Weaknesses
- The crisis in Greece continues to smolder and for every two steps forward the markets take at least one step back. Concerns of a full blown credit crisis have surfaced and cannot be ruled out.
- The European Central Bank is apparently unwilling to offer any new assistance to Greece and this disappointed the market.
- Australia raised interest rates by 25 basis points this week in a sign that central banks will move to their own tune.
Opportunities
- The best outcome would be a coordinated, comprehensive solution to not only the Greek debt situation but a broader approach that includes all of Europe.
Threats
- Until the Greek situation is resolved with some degree of certainty the market will be at the whims of macro risk factors.
