The Economy and Bond Market Diary (September 26, 2010)
Treasury bonds rallied this week sending yields lower as the Fed hinted strongly that an additional round of quantitative easing may be just around the corner. The chart below shows the yield on the 10-year Treasury, which fell 13 basis points for the week.
Strengths
- The Federal Reserve stated with inflation at low levels for the foreseeable future and elevated unemployment, additional monetary easing may be appropriate. Policy action could come in as little as six weeks.
- Durable goods orders fell 1.3 percent, but if you scratch below the surface, the weakness was driven by defense and aircraft orders. New orders rose at least two percent in every category other than defense, a very positive sign for manufacturing.
- The Conference Boardâs Index of Leading Economic Indicators Index rose a better-than-expected 0.3 percent.
Weaknesses
- New home sales in August were unchanged at 288,000. Other housing data out this week showed mixed results as the housing market continues to struggle to make significant headway.
- Initial jobless claims rose to 465,000, breaking the down trend we had experienced the past couple of weeks.
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
- European financial concerns have intensified recently as long-term solutions still appear elusive for many economies.
