The Economy and Bond Market Diary (October 4, 2o1o)
Treasury bonds rallied again this week sending yields lower, as expectations continue to build for an additional round of quantitative easing. The chart below depicts the European Commission Economic Sentiment Index which reflects general economic activity in the European Union. The index unexpectedly rose in September and is close to 2007 levels, indicating a fair amount of optimism. This is quite surprising given all the negative news out of Europe. Maybe things are better than people realize?
Strengths
- Similar to the theme in the chart above, German consumer confidence hit the highest level in three years.
- U.K. GDP growth grew the fastest in nine years, expanding 1.2 percent in the second quarter. If reported on an annualized basis as it is done in the U.S., this would equate to roughly 5 percent GDP growth.
- Manufacturing indicators around the world were generally positive this week with positive reports out of China, Europe and the U.S.
Weaknesses
- In contrast to the positive sentiment in Europe, CEO confidence in the U.S. hit the lowest level since the fourth quarter of 2009 and consumer confidence hit a seven month low.
- The S&P Case-Shiller home price index fell modestly in July and house prices remain 28 percent below their 2006 peak.
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
- Europe is looking much better than expected and possibly presents an upside risk to the global economy, implying central bankers may need to change course quicker than expected.
