The Economy and Bond Market Cheat Sheet (September 6, 2011)
Bonds rallied sharply this week as the 10-year Treasury yields hit new lows, even surpassing the crisis lows during December 2008. The primary driver of this move came on Friday as the August employment report was dismal. Nonfarm payrolls were unchanged versus expectations of an increase of 70,000. Payrolls for the prior two months were also revised lower by 58,000. Recession risks are rising. Some put the odds of another recession at 50/50 and the bond market is responding to those concerns.
Strengths
- In an apparent contradiction to other indicators, consumer spending rose 0.8 percent in July and was the biggest gain in five months.
- August same store sales data for retailers generally came in better than expected, with gains of 4-5 percent fairly common.
- August auto sales for the major U.S. producers rose sharply. General Motors sales rose 18 percent, Ford sales rose 11 percent and Chrysler sales rose 31 percent.
Weaknesses
- Nonfarm payrolls were unchanged in August, indicating a stalled economy.
- Consumer confidence slumped 14.7 points to 44.5, hitting the lowest levels since April 2009.
- The ISM manufacturing index hit the lowest levels in two years but remains in expansion territory.
Opportunities
- With the economy weak and concerns brewing about an additional financial crisis, the Federal Reserve will remain accommodative for some time and bonds appear well supported in the current environment.
Threats
- There is a crisis of confidence in world leaders at the moment and the potential for another financial crisis is rising.
