Committee for a Responsible Federal Budget

Market Watch Update: April 12-16

U.S. Treasury markets were relatively quiet most of this week, although some Friday morning news had translated into market gains, as of early afternoon. (Most notably mentioned, the SEC indictment of Goldman Sachs moved investors from stocks to bonds and lower consumer confidence in early April suggested a weak recovery in the near term.)

Commentators generally reported that demand was bolstered by safe haven effects related to continuing uncertainties with Greece’s sovereign debt challenges and possible concerns about other high debt Eurozone members. 

Somewhat offsetting the international effects, cross currents in the U.S. economy limited price movements. Retail sales in March and probably the first quarter were higher than anticipated (this is important: consumer spending is the largest part of GDP) and manufacturing improved a little. However, employment remained weak (unemployment claims have been unexpectedly rising). There are no signs of an uptick in inflation for the near future. 

Markets are closely watching the Fed for signals about when it will start raising interest rates again as the economic and financial situation returns to “normal”. So far, however, markets do not see tightening until later this year. (Illustrating how sensitive markets are, Fed Chairman Bernanke’s failure this week to repeat the Fed’s mantra that interest rates would remain low for an “extended period” in his written testimony to the Joint Economic Committee prompted markets to conclude that the Fed might tighten sooner rather than later. Yields rose slightly as a result on 2 year, 10 year and 30 year Treasury instruments. However, markets reassessed shortly thereafter based on subsequent comments made by Chairman Bernanke and other top Fed officials reasserting the Fed’s mantra.)