The US Treasury market will remain captive next week to nagging worries over Europe's debt struggle and head-spinning swings across global stock markets. These factors have weighed down sentiment and overshadowed data that signalled the US economic recovery is accelerating.
Anxious investors have piled into US government bonds, lowering benchmark yields close to five-month lows. "We are hostage to the debt crisis in Europe and the stock market. Those will be the themes for next week," said Jonathan Lewis, principal at Samson Capital Advisors in New York. Bold measures by Greece, Spain and Portugal to reduce their budget deficits and a $1 trillion aid package aimed at stabilising the euro has done little to temper investor fears.
These measures are seen as vital to prevent a sequel to the 2008-2009 global credit crunch but they have offered little assurance on the long-term health of the eurozone and its single currency, the euro, which hit an 18-month against the dollar on Friday.
"Everything is being trumped by what's going on in Europe," said Michael Zarembski, senior futures analyst with optionsXpress Inc in Chicago. He added the debt crisis has strained the unity of eurozone members, stoking more safe-haven demand for Treasuries.
Germany denied on Friday a Spanish newspaper report that French President Nicolas Sarkozy had threatened to pull his country out of the eurozone during the talks on Greece's rescue package. "The officials there are throwing more fuel into the fire. None of this is giving investors and traders any support," Zarembski said. On Friday, the yield on benchmark 10-year Treasury notes fell to 3.44 percent from 3.54 percent from a week ago and down from 4.01 percent in early April.
The 10-year yield is still above a five-month intraday low of 3.27 percent seen last Thursday when an avalanche of selling briefly wiped out $1 trillion in stock market value.
Wall Street suffered heavy losses on Friday, but still managed to eke out a weekly gain. Europe's financial woes, even Thailand's growing political turmoil, are in the forefront of investors' concerns, nearly nullifying the impact of encouraging US data, analysts said.
Friday's data on consumer spending and sentiment, and on factory output were seen as further proof the US recovery is self-sustaining, as the government's stimulus enacted last year is fading. Traders seem more occupied by a possible drag on the US economy from the euro zone debt mess, a concern that some economists say is exaggerated. Next week's major reports including April readings on the Consumer Price Index and the Producer Price Index. Economists predict they would show core inflation would stay tame, giving little reason for the Federal Reserve to raise short-term interest rates from near zero.
The median PPI forecast is for a 0.1 percent rise in April versus March, while the median prediction on the CPI is a 0.1 percent uptick last month, according to analysts recently polled by Reuters. With investors' focus on overseas developments, domestic economic news will have little market impact. "Economic data do not matter at this point," said Samson's Lewis.