The Economy and Bond Market Diary (November 1, 2010)
Treasury bond yields were mixed this week as the yield curve steepened and focus remains on the Federal Open Market Committee (FOMC) meeting next week. Economic data was mixed to in line and was not a big driver of the market overall. Consumer confidence continues to be stuck in a rut as both the Conference Board Consumer Confidence Index (below) and the University of Michigan Confidence Index remains subdued.
Strengths
- Third quarter GDP grew 2 percent, right in line with expectations. Concerns are that 2 percent growth is right around “stall” speed for the economy and likely indicates that the Federal Reserve will act next week.
- Weekly initial jobless claims hit a 3-month low—claims fell 21,000 last week and the four week average is trending lower.
- Housing news was generally positive this week as September new home sales rose 6.6 percent and September existing home sales rose 10 percent.
Weaknesses
- Consumer confidence has not returned and consumers’ view of job conditions are at the lowest levels since February.
- Durable goods, ex-transportation orders, fell 0.7 percent in a possible sign that inventory accumulation is slowing.
- China’s central bank warned that inflationary pressures must be monitored closely. This comes a week after the central bank raised interest rates for the first time in three years.
Opportunities
- Inflation is unlikely to be a problem for some time, giving central bankers and other policymakers around the world room for expansive policies.
Threats
- Inflation expectations as measured by TIPS spreads have risen sharply this month. Inflation expectations will be key data points to drive Fed policy changes going forward.
