The Economy and Bond Market Diary (October 18, 2010)
Treasury bonds sold off this week, sending yields on the 30-year Treasury sharply higher. The 30-year bond auction on Thursday was poorly received, possibly indicating investor reluctance to push yields lower.
Strengths
- Fed Chairman Bernanke indicated in a speech on Friday that “further action” (meaning monetary stimulus) would be warranted due to low inflation and high unemployment.
- Retail sales for September were better-than-expected, rising 0.6 percent. Additionally, the strength was spread throughout the sector.
- In a Reuters poll of economists, strength in emerging markets has driven expectations for world GDP growth for 2010 upward to 4.6 percent from 4.2 percent.
Weaknesses
- The bond sell off this week may mark an inflection point for the market as quantitative easing may be fully priced into the market.
- The University of Michigan Consumer Confidence Index fell slightly in its preliminary October reporting, showing no signs of improvement.
- A foreclosure crisis may be upon us, which may prolong the housing recovery.
Opportunities
- Inflation is unlikely to be a problem for some time and this gives central bankers and other policymakers around the world room for expansive policies.
Threats
- Europe is looking better than expected and possibly presents an upside risk to the global economy. This means central bankers may need to change course quicker than expected.
