The Economy and Bond Market RadarĀ (December 28, 2011)
Long-term Treasury yields ended the week sharply higher reversing last weekās rally and leaving us almost exactly where we were two weeks ago.
The sell-off in Treasuries this week could be attributed to a three-year lending program from the European Central Bank (ECB) which helps European banks secure long-term funding and is also potentially a form of quantitative easing. This induced a ārisk offā trade this week as stocks rallied and bonds sold off. Economic news was also generally supportive as the Leading Indicators (LEI) chart shows below. Leading indicators have remained relatively stable and the absolute level implies economic growth in the next six months.
Strengths
- The ECBās three-year loan program that kicked off this week reduces some of the tail risk of a significantly bad outcome for European financials.
- For the second week in a row, initial jobless claims fell to the lowest level since May 2008.
- Housing starts rose 9.3 percent in November which was much better than expected as multi-family home starts hit a three-year high.
Weaknesses
- After revisions, third quarter GDP rose a modest 1.8 percent and was revised down from the initial 2.5 percent that was originally reported in late October.
- Personal income and spending experienced disappointing growth, both rising just 0.1 percent in November.
- Economic weakness has been showing up around the world with various disappointments in Japan, India and Brazil.
Opportunities
- Economic news is expected to be relatively light next week. With the recent week-to-week volatility, the market could rally on a modest sentiment change.
Threats
- The situation in Europe remains extremely fluid and negative news is almost expected at this point. Unfortunately, the situation is politically driven, making it difficult to predict outcomes and ramifications.
