The Economy and Bond Market Radar (October 1, 2012)

The Economy and Bond Market Radar (October 1, 2012)

After rising for the past month treasury yields fell this week as the euphoria surrounding the recent central bank moves dissipated. Bond yields have risen during prior quantitative easing periods as expectations for economic growth pick up. However there are always fits and starts to the process and this week the market refocused on Spain’s continued troubles and some weak data points in the U.S. The chart below shows that durable goods orders for September plunged 13.2 percent, well below estimates. Much of the drop was attributable to aircraft orders but even ex-transportation orders fell 1.6 percent when expectations were for a small gain.

Strengths

• Consumer confidence unexpectedly rose sharply in September hitting a seven-month high. Consumers were much more optimistic regarding the economic outlook than in August.
• Weekly initial jobless claims fell to a two-month low and are showing some modest improvement.
• The S&P/Case-Shiller’s seasonally adjusted 20-city home price index rose 0.4 percent in July.

Weaknesses

• Durable goods orders in September plunged by 13.2 percent, the largest decline in over three years.
• The Business Roundtables’s third quarter CEO Economic Outlook plunged to 66 from 89.1 in the second quarter. CEO’s confidence is the weakest since the third quarter 2009 on concerns surrounding the “fiscal cliff’ and a weak global economy.

Opportunity

• There was considerable speculation about the prospects for government policy action that would support the economy or stock market. The Chinese markets will be closed next week for a holiday and this is often when the government announces policy changes.
• Interest rates are likely to remain very low for the foreseeable future.

Threat

• Europe remains a wildcard with the markets shifting focus on a weekly basis.
• China also remains somewhat of a wildcard as the economy has slowed and officials appear in no hurry to take decisive action.
• Brazil raised its inflation view and dimmed hope for additional rate cuts. Brazil was one of the first countries to cut interest rates around this time last year.