California Union Iron Works Turbine Machine Shop, c. 1918
The Economy and Bond Market Cheat Sheet (October 24, 2011)
Treasury yields were flat to down this week. It was a choppy week, up one day and down the next, and even though economic news flow and earnings data were supportive of continued economic growth, lingering concerns surrounding a possible Greek default and government policy actions to deal with that were likely responsible for the positive bias in fixed income.
One encouraging bit of information came from the Philadelphia Federal Reserve’s manufacturing data, which showed new orders bouncing back strongly and hitting the highest level since April. The recent economic data has not matched the gloom on the economy and so far third quarter earnings announcements have not indicated a significant economic slowdown. At this time it appears concerns of a “double dip” are overblown and the economy may even positively surprise.
Strengths
- Industrial production rose 0.2 percent in September, matching estimates.
- The Conference Board’s index of leading economic indicators (LEI) rose 0.2 percent in September and is up 5.9 percent on a year-over-year basis.
- Housing starts jumped a surprising 15 percent in September, with the greatest demand seen in multi-family housing.
Weaknesses
- China’s GDP grew 9.1 percent in the third quarter. While 9.1 percent is very strong in absolute terms, it was below the 9.3 percent expected and the slowest growth in more than two years.
- Consumer prices in the U.K. hit 5.2 percent in September, which is a three year high. Commodity prices have receded in recent months and expectations are for lower inflation so this data point is somewhat troubling.
- Mortgage applications hit a 15-year low even as mortgage rates have hovered around 4 percent in recent weeks.
Opportunities
- With the economy weak and concerns brewing about an additional financial crisis, the Fed will remain accommodative for some time and bonds appear well supported in the current environment.
- Globally, central banks have become attuned to the risks of a global slowdown and will likely act to bolster economic growth.
Threats
- All eyes will be on the European Summit this weekend. A positive outcome could be a threat to the treasury market which has benefitted from a “flight to quality.”
- The treat of another global financial crisis cannot be ruled out.
