The Economy and Bond Market Cheat Sheet (October 3, 2011)
Bond yields rose this week as the financial markets gyrated and the focus remained on whether Greece would receive the next round of funding that is scheduled for October. The markets remain very volatile with bonds trading roughly inverse with equities.
In a sea of negativity, we did receive some encouraging news on Friday as the Chicago Purchasing Managers Index (PMI) unexpectedly rose to 60.4 in September; a decline had been expected. This bodes well for the closely watched ISM Manufacturing Index that is scheduled for release on Monday, and if the results are better than expected, that would likely boost economic sentiment.
Strengths
- After much deliberation and debate Germany approved a stronger European bailout fund and allowed policymakers more time to deal with the Greek debt situation.
- The Chicago PMI exhibited surprising strength and is a ray of hope for the manufacturing sector.
- Weekly initial jobless claims fell below 400,000 for the first time since early August and is at least moving in the right direction.
Weaknesses
- The housing market remains grim as new home sales in August hit a six-month low, August pending home sales hit a four-month low, and prices remain below a year ago.
- The Conference Boardâs Consumer Confidence Index remains at very low levels and the âjobs hard to getâ component hit the highest level since 1983.
- International economic data is also signaling a slowdown as Japanese retail sales fell 2.6 percent in August.
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
- The threat of a more significant global economic slowdown than many expected just a couple of months ago has increased sharply.
