Overall economic indicators remain mixed in the U.S., while concern continues for the performance of the global economy. Last week's U.S. economic data added to the difficulty in determining the direction of the U.S. economy, with a few indicators pointing to stronger growth and others showing continuing signs of sluggishness.
On the stronger side, the University of Michigan Sentiment data showed an increase from 93 to 95.9 -- the second highest reading since 2007. The Consumer Price Index (CPI) was also a modest positive, with CPI excluding food and energy up to 1.8% year over year versus an expectation of 1.7%.
On the weak side, retail sales were lower than expected -- up only 0.9% versus 1.1% -- and retail sales excluding autos was 0.4% versus the expected 0.7%. Industrial Production was also below expectation, with a decline of 0.6% month over month versus an expected decline of 0.3%.
I think the underlying economic data (leading indicators) supports a pickup in the economy in the second and third quarters, and that the U.S. will grow approximately 3% this year due to easy global monetary policies, strong employment, wage gains and lower commodity prices.
This week, we should receive more news on the Greek debt crisis and what type of solution, if any, has been agreed upon with creditors. The time is running out on coming up with a, at a minimum, temporary solution, as Greece's available cash continues to decline. I believe the brinksmanship between Greece and the Euro-zone economies -- mainly Germany -- will result in at least a temporary deal, but both sides have very entrenched positions. The market is priced for this expectation, so any outcome that makes it more likely that Greece exits the euro -- which is not priced into current expectations -- could add significant volatility. Last week, Greek bond yields increased by more than 150 basis points (bps) to 12.70%, while German yields fell by 8 bps to 0.08%.
The trading ranges in both the bond and stock markets continue to hold. The market tested the upper end of the range on the S&P 500 Index but was not able to close above the 2109 level. The 10-year Treasury is trading near the low end of its tight trading range at around 1.86%. I expect that the longer we stay in this type of tight range bound market, the greater the speed and magnitude of the eventual breakout. I like to visualize the market as a spring, and time is the pressure used to compress the spring. The more time that goes by, the more the spring is compressed, and the greater the recoil when the spring eventually snaps back. We may see more volatility in the coming weeks.
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