The Economy and Bond Market Cheat Sheet (January 31, 2011)
U.S. Treasuries rallied, driving yields modestly lower. The market chopped around some this week and was roughly unchanged through Thursday, but on Friday the continuing unrest in Egypt and the surrounding region initiated a flight to safe assets such as U.S. Treasuries. Fourth quarter GDP rose 3.2 percent, just under expectations, but underlying trends remain positive. Growth of 3.2 percent is not a bad showing and is about what the economy averaged in the 10 years before the financial crisis.
Strengths
- GDP grew 3.2 percent and reinforces the idea of a sustained economic recovery.
- The Fed announced no change in policy at this week’s Federal Open Market Committee (FOMC) meeting, keeping very stimulative policies in place.
- The National Association for Business Economics sees hiring picking up over the next six months based on its Net Rising Index for employment which hit the highest level since the index was created in 1998.
Weaknesses
- Initial jobless claims rose to 454,000, well ahead of expectations and sending mixed signals on the health of the job market.
- Durable goods orders for December fell 2.5 percent on weak aircraft orders.
- The British economy unexpectedly contracted in the fourth quarter by 0.5 percent.
Opportunities
- The rise in yield on the 10-year Treasury since the October low to levels comparable to those existing in May 2010, may offer an attractive entry point for bonds.
Threats
- The economy appears to be performing better than many expected and could be a threat to fixed income markets as yields move higher in response.
