The Economy and Bond Market Diary (October 11, 2010)

The Economy and Bond Market Diary (October 11, 2010)

In a repeat performance from last week, Treasury bonds rallied, sending yields lower as expectations continued to build for an additional round of quantitative easing. The chart below depicts the 10-year Treasury yield hitting new 52 week lows.

Strengths

• Quantitative easing appears to be a foregone conclusion as weak employment numbers likely secured its implementation at the next Federal Open Market Committee meeting on November 3.
• The Bank of Japan cut interest rates to essentially zero and announced a $60 billion quantitative easing plan.
• The ISM Non-Manufacturing Index rose and indicated expansion as the export component hit a three-year high.

Weaknesses

• Employment data remains weak as September’s nonfarm payrolls fell 95,000.
• Factory orders fell 0.5 percent in August.
• The U.S. dollar continued to fall in anticipation of the Fed’s quantitative easing program.

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.