The Economy and Bond Market Radar (January 9, 2012)
Long-term treasuries sold off this week sending yields higher as; once again, the schizophrenic market gyrates up one week, down the next, for over a month.
The sell off in treasuries this week could best be attributed to better than expected economic data. While there remains concern surrounding the ultimate outcome of the current European financial crisis, the market was able to put that anxiety to the side this week. The chart below depicts the JP Morgan Global PMI index which hooked up in December and is back into expansion territory. This is an interesting development as sentiment remains sour but the economic data is giving reason for optimism.
Strengths
- The unemployment rate fell to 8.5 percent as nonfarm payrolls expanded by 200,000 in December.
- The ISM manufacturing index increased more than expected and posted a solid gain in December. One particularly encouraging sign is the new orders sub-component hit the highest level since April.
- Factory orders in November rose 1.8 percent and is another factor confirming the strength in the manufacturing sector.
Weaknesses
- Overnight deposits with the European Central Bank hit a record high as banks are still unwilling to lend to each other in the overnight interbank market. This indicates significant lack of confidence in the European banking sector.
- The euro fell to the lowest level in more than a year as investors concerns build regarding the ultimate outcome in Europe.
- France plans on increasing its value-added tax (VAT) in the next few months even as a rate increase just took effect January 1.
Opportunities
- After surprisingly good economic news recently, next weekās December retail sales data will be the key economic data point to watch for continued confirmation.
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.
