The Economy and Bond Market
The Treasury yield curve flattened this week as yields rose on the short end of the curve while the 30-year bond experienced a modest decline in yields. The Treasury issued $118 million in 2-, 5- and 7-year maturities, pressuring the short end of the market. In addition, economic data continues to show improvement and that also weighed on investor sentiment.
One of the strongest signs that the economy continues to progress is the improvement in employment indicators such as the weekly initial jobless claims data, shown below. While there is still plenty of room for improvement, we are at the lowest levels since mid-2008.
Strengths
- All indications are the holiday shopping season was a relative success and consumers were willing to open their pocketbooks for a little holiday cheer.
- The Consumer Confidence Index bounced back this month and expectations are improving.
- South Korean president Lee Myung-bak expressed confidence that the South Korean economy will grow faster in 2010 than the official government forecast of 5 percent. Historically, South Korea has been a good barometer for global growth and this news is very supportive of strong global GDP growth in 2010.
Weaknesses
- The Federal Reserve is considering options for withdrawing the emergency monetary stimulus that was put in place to combat the global financial crisis. This week’s proposal included potentially selling term deposits to banks to reduce excess reserves. The market is concerned that the termination or reversal of these programs could put upward pressure on bond yields.
- Money supply in the Euro zone fell slightly on a year-over-year basis in November for the first time since records began in 1991 and indicates potential headwind for future growth.
- China is also targeting a slowdown in money supply to about 17 percent in 2010, versus roughly 30 percent in 2009.
Opportunities
- 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.
Threats
- The Fed reiterated their monetary policy stance at the December 16 Federal Open Market Committee (FOMC) meeting and on the surface nothing really changed. However, they are incrementally moving to reduce the policy accommodation and often these changes move more quickly than many expect.
