The Economy and Bond Market Diary (September 7, 2010)
Treasury bonds were mixed this week with long-term yields moving higher while shorter-term yields generally fell modestly. The long end of the market sold off on better than expected economic data as the ISM Manufacturing Index and nonfarm payrolls were better than expected.
The chart below shows the change in nonfarm payrolls. While they are still in negative territory, they beat expectations.
Strengths
- As noted above, nonfarm payrolls declined 54,000 in August, but expectations were for a decline of 100,000. June and July payrolls were revised higher by 123,000, so the combination of the two dampened the negative sentiment around the economy.
- The ISM Manufacturing Index rose to 56.3 in August from 55.5 in July. This was a very positive surprise since expectations were for a decline to 52.8. China’s Purchasing Manufacturing Index ticked higher as well, beating expectations and building the case for a soft landing for China’s economy.
- Consumer confidence also rose in August indicating at least some stabilization in sentiment.
Weaknesses
- July construction spending fell one percent and construction activity fell to the lowest level since 2000.
- While retail sales in August were generally better than expected, auto sales were very weak, indicating that big ticket items are a tough sale without incentives.
- Initial jobless claims are still mired in a slump. While Friday’s employment report was better than expected, the economy still lost 54,000 jobs well over a year into the recovery.
Opportunities
- Inflation is unlikely to be a problem for some time and this gives central bankers and other policy makers around the world room for expansive policies.
Threats
- Minutes from the Fed’s August meeting were released and confirmed that there is considerable dissention within the Fed on additional quantitative easing.
