Roundup: Economy and Bond Market (12/24/2009)

The Economy and Bond Market

The yield on the 10-year Treasury note increased by 26 basis points during the holiday-shortened week, leaving the yield at 3.80 percent. The spread between the two-year note and the 10-year note reached a record 285 basis points during the week, likely reflecting investor concern about future inflation levels.

Current inflation, as measured by the Personal Consumption Expenditure Core Price Index (PCE Deflator) shown below on a year-over-year basis, remains relatively contained. The November data released this week showed a 1.4 percent year-over-year increase and was flat on a month-to-month basis.

Strength

• Sales of existing U.S. homes in November rose 7.4 percent to an annual rate of 6.54 million homes, greater than the forecasted rate of 6.25 million.
• Price inflation data this week slightly beat expectations. The Personal Consumption Expenditure (PCE) Price Index for November was up 1.5 percent year-over-year versus a 1.6 percent consensus.
• Personal income in November increased 0.4 percent from October, the fifth consecutive month-over-month increase and the biggest monthly increase since May, while personal spending increased 0.5 percent. The increases left the savings rate unchanged at 4.7 percent for November.
• Initial jobless claims last week declined to 452,000, down from 480,000 the previous week. This was the lowest level since September, 2008. The four-week average for claims, which smooths out fluctuations, fell to 465,250, its sixteenth-straight weekly decline.
• Orders for durable goods increased 0.2 percent in November. However, durable goods orders excluding transportation increased by 2.0 percent, almost twice the 1.1 percent forecast.

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Weakness

• Sales of new U.S. homes in November fell 11.3 percent to a seasonally adjusted annual rate of 355,000, below the expected rate of 438,000.
• Real U.S. gross domestic product (GDP) for the third quarter was revised downward to 2.2 percent from the previously reported 2.8 percent.
• The Richmond Federal Reserve Bank’s Manufacturing Sector Activity Index fell to minus four in December from a positive one in November and a positive seven in October. The consensus expected it to rebound to five.

Opportunity

• Expectations continue to build for growth in the U.S. in the current quarter, possibly as much as 4-5 percent. The global economic recovery appears to be taking hold.

Threat

• The Fed reiterated their monetary policy stance in the prior week and on the surface nothing really changed but they are incrementally moving to reduce the policy accommodation and often these things move quicker than many expect.