Market Analysis

Bonds are flat this morning despite a weaker than expected April Durable Goods Orders report which was down 3.6% for the month vs an expected decline of 2%.  March was revised up from 4.1% to 4.4% growth.  Excluding the more volatile Transportation component Orders were down 1.5% vs an expected increase of .6%.  March's Durable Goods Orders ex-transportation were revised upward from 2.3% growth to 2.5%.

In international news, revised GDP report from England showed that growth was only .5% for the 1st Qtr of 2011.

In Paris, the Organization for Economic Co-operation and Development (OECD) provided what appears to be a very credit assesment of the the global economic situation.  According to a Financial Time report on the OECD analysis, the US economy is forecast to grow by 2.6 per cent in 2011 and 3.1 per cent in 2012, with 2 per cent growth in the eurozone both years, according to the OECD. Unemployment will remain high across most advanced economies and stay significantly higher than before the crisis. Even with the chances of a self-sustaining recovery, the OECD does not expect rapid growth in the years ahead because the effects of the financial and economic crisis will linger in advanced economies, The global economy is exiting the recession but is not returning to business as usual.  For the next few years, significant downside risks to growth exist, including a slowdown in China, a crisis in the eurozone and continued rises in commodity prices. Despite the downside risks, the OECD recommended monetary policy in the US and the UK begin to tighten early because deflation risks have faded and because of the risk that higher inflation become entrenched into wage rises and persistent price rises. According to Pier Carlo Padoan, the OECD’s chief economist, “Monetary policy should not be caught out by surprise because expectations get suddenly out of control.”  The OECD said the Fed should raise its main policy rate significantly faster than market expectations, with the first increase in mid-2011 and a total rise of 1 percentage point in the rest of the year. The Bank of England, it said, should “start to raise the policy rate soon” with the speed of rate rises dependent on the success of fiscal consolidation. It expected interest rates to be 2.25 per cent by the end of 2012, again much faster than the market expectation.  One of the most significant problems for advanced economies, the OECD said, was that the level of output was likely to be persistently lower than expected before the crisis and sustainable growth rates might also have fallen. Both exacerbate the difficulty and necessity of cutting budget deficits.  The OECD reserved particular criticism for the US budget deficit, which it described as a “highly unsustainable position, risking serious adverse reactions in financial markets”.  “Given the scale of the required consolidation [in the US], such a plan would have to include all the big categories of expenditure, notably entitlement spending and defence outlays as well as revenue increases. In view of the rapid rise of public debt and the need to make plans credible, any plan should contain up-front measures,” the OECD outlook added. And for the next few years, significant downside risks to growth exist, including a slowdown in China, a crisis in the eurozone and continued rises in commodity prices.  Despite the downside risks, the OECD recommended monetary policy in the US and the UK begin to tighten early because deflation risks have faded and because of the risk that higher inflation become entrenched into wage rises and persistent price rises.