The Economy and Bond Market Radar (November 28, 2011)

The Economy and Bond Market Radar (November 28, 2011)

Treasury yields ended the week lower as European concerns continued to dominate the headlines and with the eventual outcomes remaining unclear. Treasuries and the U.S. dollar rallied this week in an apparent flight to safety.

The chart below depicts the 10 year Italian Government Bond yield which hit a new high this week as the slow motion European crisis is now weighing heavy on “core” Europe. With yields moving higher across the entire European continent, a “bailout” of some sort is becoming a quaint idea as the magnitude of a bailout would dwarf the resources available, and the countries that would fund the bailout now appear in need of one themselves.

Strengths

• Weekly initial jobless claims remained below 400,000 for the third-straight week, suggesting that hiring may be on the upswing.
• Existing home sales rose 1.4 percent in October and were ahead of expectations.
• Durable goods orders fell 0.7 percent but that was well ahead of expectations and ex transportation rose 0.7 percent.

Weaknesses

• The “Super Committee” failed to come to an agreement on spending cuts which may ultimately negatively affect the U.S. credit rating.
• European sovereign bond auction failures are becoming commonplace and this week a German Bund auction failure likely moves the crisis into new and potentially more dangerous territory.
• The HSBC China manufacturing index fell to the lowest level in almost three years, stoking fears of a “hard landing” in China with international repercussions.

Opportunities

• Minutes of the November 1-2 Federal Open Market Committee (FOMC) meeting were released this week, and indicated a willingness to consider additional easing.
• The upcoming week will be relatively busy for economic data. The ISM manufacturing index and Thursday and the employment report on Friday will be key items to watch.

Threats

• The situation in Europe remains extremely fluid and negative news is almost expected at this point. Unfortunately it is politically driven and difficult to predict outcomes and ramifications.