12. July 2011 04:59
The bond market has followed Friday’s sharp rally with further rallies on Monday and through this morning, although the rally has faded since early am today.
The primary culprit is ‘Europe’ – not only did politicians actually start talking about a formal Greek default openly this past weekend, but Italian bond yields have been rising as the debt contagion enters a very dangerous stage. Italy’s economy is as large as Greece, Portugal, Ireland, and Spain put together so the mere thought of a crisis there has caused markets to take a more defensive approach. Italy’s parliament has proactively engaged in budget talks aimed at eliminating that country’s deficit by 2014.
In addition to the European sovereign issues, the US continues to deliberate on a budgetary package that will get the number of votes necessary in Congress to raise the debt ceiling before the government runs out of the ability to borrow further during the first week of August. Republicans, who raised the debt ceiling some seven times under George Bush, are opposed to any tax increases, while Democrats are opposed to cutting spending on social programs such as medicare and social security.
Expect these global issues to dominate markets over the coming weeks. In terms of hard data we can watch for, the US is releasing Retail Sales and Business Inventories on Thursday, and the Consumer Price Index, Empire State Manufacturing Index, Capacity Utilization, Industrial Production, and Consumer Sentiment (all Friday). Canada releases Manufacturing Shipments on Friday.