Week of May 21 – 25, 2012

Economics
In general, U.S. economic data last week was slightly above expectations. Despite continued weak Eurozone economic numbers, there were some encouraging policy discussions. The “pain in Spain” continues.

Housing prices jumped 2.7% year over year and values increased in every region, a sign that a housing recovery may actually be gaining traction. Prices were up 1.8% in March. Record low mortgage rates are helping.

Purchases of previously owned U.S. houses climbed 3.4% in April to a 4.62 million annual rate. This number is better than expected.
New home sales rose 3.3% to a 343,000 annual rate, also better than expected.

Durable goods rose .2%, but non-military excluding aircraft fell 1.9% after falling 2.2% in March. This was the first back to back decline in a year. Slowdowns in Europe and Asia, along with a reduction in U.S. business spending and the remaining effect of the expiration of favorable business investment tax breaks at the end of 2011, may all be contributing.

What inflation? The difference between the Ten Year Treasury and Ten Year Treasury Inflation Notes fell to 2.04% last week, the lowest since the beginning of January. This is an indication that the market is cutting expectations on inflation. The market believes that the Fed has room to continue with stimulus plans such as Operation Twist (swap of short term debt for long term debt) and possibly QE3. There appears to be less concern with inflation and more concern with growth.

Global
Problems in Spain continue to plague the markets. Over the weekend, reports suggested that Spain may need an extra 30 billion Euro to clean up its banking system. Spanish equity markets slipped more than 3.5% on Monday trading.

European Union summit was disappointing. EU leaders delayed decision making until the next summit on June 28th. This will be after the Greek elections on June 17th. There appeared to be more support for a Euro-wide plan to shore up banks, including joint guarantees for deposits and allowing the European Stability Mechanism to invest directly into banks. Germany remains opposed to jointly issued “Eurobonds”, while France’s Hollande is strongly in favor.

Weaker economic numbers in Europe last week- The European Manufacturing Index and German Business Confidence Index both fell more than expected. The UK revised 1st Quarter GDP downward.

30 Year Bund dropped below 2% for the first time ever. Germany also sold two year bonds with a 0% coupon, priced at a slight discount to yield .07%.

China- The government states they plan to speed up approval of infrastructure projects and construction spending to help shore up growth.

Fitch cut Japan’s rating to A+ with a negative outlook.

Markets
It was another rough week in U.S. and global equity markets. Month to date, S&P is -5.7%, Dow -.4%, gold 5.7% and U.S. 10 year bonds have fallen from 1.98% to 1.75%.

Corporate bond spreads have continued to widen. The Bank of America ML index of high yield corporate debt rose by 54bp to 713bp. Concern that the U.S. economic recovery is stalling along with European contagion and JP Morgan losses, has raised concerns.

While U.S. state budget issues remain front page news, even the hardest hit states have found it easy to sell debt. The extra yield required on California bonds fell to a three year low, even as California faces a swelling budget deficit. Gov. Brown has proposed state worker pay cuts of 5%. The state spending deficit rose 71% in 2012.