April 2011

Fixed Income Market Recap
Economic data released during the month of April were solidly representative of a self-sustaining economic expansion. Of the major indicators, retails sales were surprisingly strong, consumer confidence improved smartly, and even the housing market showed some life, with housing starts and building permits both registering better than expected monthly results. However, interest rates defied convention and fell on the better than expected news.

Economic Overview
A source of minor debate during the month was the initial claims for unemployment insurance statistics, which are released every Thursday. As the name implies, the measure represents the number of people making their first filing for unemployment compensation. Since peaking above 650,000 in 2009, the number has steadily fallen, with the measure ticking as low as 385,000 on the first Thursday of the month. Investors became concerned as subsequent weekly readings steadily rose, with the latest measure rising to 474,000. While such a rise in newly unemployed would force us to reconsider our accelerating economy thesis, the underlying data do not support such a concern. As is the case with much of the economic data reported by the government, the initial claims measure is adjusted by a seasonal factor designed to smooth out seasonal variations in economic activity. One such example is the auto industry. Once a year, typically in July, the auto manufactures cease operations for two weeks to retool the assembly plant for design changes to be implemented in the new model year. For that two week period, 100,000 auto workers join the ranks of the unemployed and are entitled to unemployment insurance. To avoid reporting that annual unemployment “blip,” the Bureau of Labor Statistics simply subtracts 100,000 from the total initial unemployment claimants, and then adds them back at the end of the period. Such was the case with the weekly releases throughout April. Looking past the seasonal adjustment to the actual change, the relatively steady trend in unemployment continued. Understanding that select few market participants look past the headline number, we consider the uptick to be noise and not meaningful data, and certainly not meaningful enough to change our opinion on growth.

As scheduled, Federal Reserve Chairman Bernanke hosted a press conference following the conclusion of the April 27th FOMC meeting. As stated, the goal was to clarify the collective thinking of the FOMC, including thoughts and concerns surrounding monetary policy, unemployment, and inflation. Surprisingly, the press was rather kind to the Chairman, limiting their questions, for the most part, to broad macro themes. While Chairman Bernanke looked ill at ease at times, he was fairly forth-coming with his answers. As expected, he did not give a date as to when monetary policy would be reversed, he denied that the Federal Reserve was intentionally pursuing a policy of dollar weakness, and he thought that the recent uptick in inflation would be transitory and not problematic. In all, the press release was a repeat of his recent speeches. Anecdotally, on the day following the Chairman’s press conference, the Commerce Department announced that U.S. GDP in the first Quarter topped an annualized $15 trillion for the first time in history and marking the seventh consecutive quarter of growth.