U.S. markets continued to be dominated this week by the continuing roller coaster ride from the Greek (and eurozone) debt crisis. More positive U.S. economic news appeared to be less important. The cause of last week’s stunning drop and subsequent recovery in the U.S. stock market is still not well-understood.
It wasn’t enough that we had a lot of impressive economic news this week (including today’s solidly positive employment numbers – even though structural unemployment remains a huge problem). It appears that the recovery is finally on track, although perhaps subpar compared to other recoveries. Moreover, structural unemployment will remain a tough nut to crack for awhile.
But US markets did not on balance reflect the good economic news.
On April 30, the Bureau of Economic Analysis released its first estimate of first quarter real GDP. Typically, the first estimate is revised a lot in the two follow up estimates, but it is still useful as the first nearly complete snapshot we have of the economy this year.
As of mid-day Friday, April 30, the government bond market was on track to have a good week, with prices up (and therefore yields down, because they move in opposite directions).
According to the financial press, a key driver was end of the month effects (managers needed to buy newly auctioned Treasury instruments, to close the loop on their monthly portfolio strategies).
Safe haven effects from the sovereign debt crisis in Greece were also thought to increase demand for U.S. Treasury instruments.
Be sure to join America Speaks this afternoon from 3 - 4:30 pm for a National Briefing on Our Budget and Economy. A panel of experts, including Maya MacGuineas, Alice Rivlin, David Walker, Alison Fraser, and Bob Greenstein, will discuss the country's fiscal health and will respond to questions posted by viewers over the internet.
The webcast of the event is below.
As of mid-day Friday, April 23, the yield curve looked steeper for the week (that is, interest rates rose on Treasury instruments at the longer end of the maturity spectrum). Market commentary was cited as the main driver, the response of investors to stronger than expected U.S. data suggesting that the recovery was taking hold. As the U.S. and global economies show signs of returning to some sort of normal, investor interest in U.S.
Airline traffic may not be the only thing slowed by Iceland’s volcanic eruptions. The slow-moving, fragile economic recovery may take a hit as well. While a just-released report from the International Monetary Fund predicts stronger worldwide growth than previously predicted, the projections were made before the volcano erupted.
The big question now is: Did the volcano blowing its stack cause enough damage to cool optimism about a recovery?
According to the IMF, we are entering a new phase of the economic and financial crisis: the world has averted a depression, a recovery is taking hold (multispeed, depending on the country), and the recovery looks stronger than it had expected in the fall.
US growth this year is expected to be 3.1% (about half a percentage higher); and 2.6% next year (slightly higher). The Fund attributes the US recovery to fiscal stimulus, and notes that private demand remains weak.
Here are the highlights from this weekend’s editorials on fiscal and budget policy:
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.