The Economy and Bond Market
Treasury bond yields moved higher this week as economic data was generally supportive of an improving economy. Manufacturing data was better than expected and reinforced the idea of a steadily recovering global economy. The ISM Manufacturing Composite Index is displayed below, but similar good news was also released in China, India, Europe and the UK, all very supportive of a growing global economy.
Strengths
- The ISM Manufacturing Composite Index fell slightly in November to 56.6, but maintained a very high absolute level, indicating manufacturing expansion.
- Retail sales in November and around "Black Friday" were generally better than expected and supportive of the idea that the economy may be improving more than generally perceived.
- Consumer Confidence rose in November, confirming the gains seen in retail sales and possibly driven by the Federal Reserve's additional quantitative easing or the mid-term elections.
Weaknesses
- Euro zone financial concerns remained in the news as Portugal, Spain and even Italy have come under scrutiny. Late in the week, the European Central Bank was apparently in the market buying bonds to help calm the market.
- The November employment report was disappointing as the economy gained a modest 39,000 jobs, while a gain of 150,000 was expected.
- Perceptions surrounding the economy appear to be changing as expectations are being revised higher for 2011, putting pressure on bond yields.
Opportunities
- Inflation is unlikely to be a problem for some time, giving central bankers and other policy makers around the world room for expansive policies.
Threats
- The housing foreclosure problems currently being experienced by the large banks and other mortgage lenders threaten to delay the market clearing process in the housing market, thereby serving as a continuing drag on the economy.
