The Economy and Bond Market Diary (August 9, 2010)
Treasury bonds rallied again this week on generally negative economic news. Two year Treasuries hit all-time record lows, falling below 50 basis points as prospects for a Fed rate increase appear remote.
The two big pieces of economic news this week was the ISM Manufacturing Index and the unemployment report. ISM declined for the third month in a row but still remains at a healthy level. The unemployment report disappointed as nonfarm payrolls fell 131,000, as can be seen in the chart, and June’s payrolls were revised down by an additional 96,000 jobs. The media spin was that the report was neutral, citing an increase in manufacturing employment, a roll off of census workers and an uptick in average weekly hours worked. With the economy losing 227,000 jobs in the last two months right in the middle of an economic recovery you need rose-colored glasses to think that this is in any way positive.
Strengths
- Nonmanufacturing ISM unexpectedly rose last month.
- European Central Bank President Trichet predicted growth in the third quarter and surprisingly ruled out the possibility of a double dip recession.
- Mortgage rates continue to fall, hitting fresh lows again this week at 4.49 percent.
Weaknesses
- Nonfarm payrolls fell 131,000 in July.
- Retailers same store sales data for July generally disappointed, and car sales for July also disappointed.
- Factory orders fell 1.2 percent in June, this is on top of the 1.8 percent decline in May.
Opportunities
- Inflation is unlikely to be a problem for some time and this gives central bankers and other policy makers around the world room for expansive policies.
Threats
- The risk of austerity measures going too far and significantly diminishing economic growth is a real risk.
