Despite a generally quiet week, the pressure remained on risky assets, as important economic data increased the probability of some of the downside scenarios for the US economy.

Equity movements were fairly muted, with the S&P500 down around 70bps, the UK’s FTSE down around 1.3%, and Europe a bit weaker. Asian markets fared a little better, with Hong Kong off 0.4%, Japan off around 0.2% and China A-shares rising.

Government bonds were generally the week’s winners, with 10-year Treasury yields down 14bps at one point before finishing the week down only bps. 30-year issues dropped more than 20bps, to levels last seen in March of last year. 10-year Gilts saw no real pullback on the week and saw yields drop by 14bps; similar moves were seen in the German bund market.

The economic news last week was certainly supportive of such moves. While it was probably no surprise to see weak housing activity data in the US, as the industry struggles with the expiry of tax credits, the signs of slippage were more widespread. Two data points in particular triggered alarm bells: initial weekly claims for unemployment insurance; and the manufacturing survey from the Philadelphia Federal Reserve, known affectionately as the Philly Fed Survey.

Initial claims provide a useful high-frequency indicator of layoff activity, showing the number of new benefit claimants each week. This number has spent most of the last three months in a range between 450,000 and 470,000. This is hardly a strong number, but even an economy with falling unemployment usually posts numbers of around 350,000. Also, this range represents a material improvement on the 650,000 peak seen in early 2009. So it was an unwelcome surprise to see claims above the 470,000 mark for a third-successive week, as the latest print took us back to 500,000.

Every commentator began the year emphasising the importance of the job market to the sustainability of the recovery, and it follows that a labour market moving in the wrong direction is a serious challenge to the health of the recovery.

Looking beyond the labour market, one could say that the underlying driver of hiring is how companies are feeling about the world. Service industries have generally remained rather cautious, but manufacturers globally have been a bright spot since the start of the year. So it was a worry to see the Philly Fed Survey, which is perhaps the largest of the regional US surveys, reporting a sharp downturn in business conditions for manufacturers.

In one sense, this was not surprising – the rapid manufacturing recovery was always going to moderate. But the latest data indicate there is a risk of manufacturing downshifting before the service sector is ready to resume its growth.

How does this news affect our broad survey of the economic outlook? Well, it’s important to register that these developments raise the risk of economic disappointments to come: even if the US avoids recession, it needs growth of 2% or more to bring the unemployment rate down and that is now open to dispute.

It seems likely that the doubts in investors’ minds will now continue to linger after summer is past. As such, we have been making moderate reductions in risk positions by adding put option protection, and by reducing some holdings in European and Japanese equities.

But at this point it’s also important to add some longer-term context. Corporate spending has been improving through much of the year, and offers enough firepower to limit the effect of government belt tightening. Households have repaired balance sheets quicker than most thought possible, even in problem countries like the US and the UK.

And, perhaps most interestingly, the gradual normalisation of bank lending markets seems to be ongoing. There are some anecdotal signs of bank lending starting to increase, while aggregate surveys of loan demand and lending standards are pointing to an easing in both.

These create the potential for significant support for the economy in 2011, and leave us still positioned with a small overweight in equities and additional investments in areas such as EM debt and High Yield.

The latter is particularly interesting in the current environment, as our work suggests that High Yield returns hold up particularly well in weak growth environments. That enthusiasm doesn’t stretch to governments, despite the renewed buying frenzy, with European yields in particular looking stretched as they return to late 2008 levels.