The Economy and Bond Market Cheat Sheet (October 31, 2011)

The Economy and Bond Market Cheat Sheet (October 31, 2011)

Treasury yields were higher this week as European leaders reached an agreement in principle to recapitalize the region’s banks, address the Greek debt situation and expand the European Financial Stability Facility. This agreement largely removed the threat of another full-blown financial crisis and money shifted back toward riskier assets.

Another piece of good news that supported riskier assets this week was the release of third quarter GDP data. GDP rose 2.5 percent in the third quarter, matching expectations but also quieting some critics expecting the U.S. to fall back into a recession.

Strengths

• The resolution of the immediate crisis in Europe was the most significant positive event this week.
• GDP rose 2.5 percent in the third quarter as consumer spending rose 2.4 percent.
• September durable goods orders, excluding the volatile transportation sector, rose 1.7 percent. This is the largest rise six months.

Weaknesses

• Consumer confidence fell to the lowest level since March 2009, which was the bottom of the global financial crisis. Concerns surrounding jobs and real incomes drove the survey down.
• Global news flow continues to point toward an economic slowdown as U.K. factory orders fell to the lowest level this year, the Bank of Canada sharply reduced its fourth quarter GDP forecast and expectations are for growth to slow below four percent in Brazil next year.
• Inflation risks remain as the Reserve Bank of India raised interest rates by 25 basis points due to stubbornly high inflation.

Opportunities

• With the European news behind us for the time being, investors will refocus on economic data such as next week’s ISM manufacturing report, the Federal Reserve Open Market Committee (FOMC) meeting and October unemployment data.

Threats

• While the current European plan to deal with the crisis is a positive step forward, many details still need to be worked out. Moreover, the plan does not deal with potential problems in other European countries such as Portugal, Spain and Italy.