Roundup: The Economy and Bond Market

The Economy and Bond Market

The Treasury yield curve reversed last week’s move and steepened this week. Yields fell for shorter-term securities, while the 30-year bond saw rates rise.

Economic data was mixed this week as the highly anticipated employment report on Friday disappointed. The chart below graphs non-farm payrolls, which is the widely used proxy for job creation. Non-farm payrolls fell 85,000 in December, surprising many market observers who anticipated an actual increase in jobs. The brighter side to the story is the fact that economic recoveries often proceed with fits and starts and this week’s data doesn’t change the big picture trend of an economic recovery.

Strengths

• December same store sales rose 3 percent and broadly speaking beat expectations. Consumers are apparently willing to spend a little more and this behavior is consistent with a recovering economy.
• The ISM manufacturing index rose to the highest level in more than three years and continues to indicate an expanding economy.
• Factory orders also rose for the third straight month, jumping 1.1 percent in November.

Weaknesses

• December employment data disappointed. Non-farm payrolls fell 85,000 and quashed hopes of a quick return to employment growth.
• November construction spending fell for the seventh month in a row and highlights the difficulties still facing the economy.
• California Governor Arnold Schwarzenegger is asking the federal government for additional funds to cover California’s budget shortfall. States across the country have similar issues and are cutting spending to balance budgets.

Opportunities

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

Threats

• The Fed reiterated its monetary policy stance at the December 16th FOMC meeting. On the surface nothing really changed, but the committee is incrementally moving to reduce the policy accommodation and often these things move quicker than many expect.