The Economy and Bond Market Radar (October 9, 2012)

The Economy and Bond Market Radar (October 9, 2012)

Treasury bond yields rose this week on better-than-expected economic data. The ISM manufacturing index rose more than expected in September and moved back above the critical 50 level, indicating expansion in manufacturing. The unemployment report was released on Friday and was generally well received with a lot of focus on the headline unemployment rate falling below 8 percent to 7.8 percent. The change in nonfarm payrolls was only 114,000, hardly enough to push the unemployment rate down by 0.3 percent. It is estimated that all else being equal, nonfarm payrolls need to grow by 125,000 per month just to maintain the unemployment rate as new workers enter the market faster than people leave the market. The chart below depicts how the unemployment rate has fallen from a high of 9.9 percent in April 2010 to the current 7.8 percent. Since the end of 2009, nonfarm payrolls have averaged just 127,000 per month, essentially break-even job growth. The drop in the unemployment rate is due almost entirely to people leaving the labor force, as opposed to any significant job creation. There were also some seasonal adjustments in this report that helped drive down the unemployment rate. Ironically, the economy appears to be doing better because people have given up hope and are no longer even looking for jobs.

Strengths

• Nonfarm payrolls rose 114,000 in September and the prior two months were revised higher by 86,000. Overall, this was better than expected and a modest positive for the economy.
• The ISM manufacturing index rose to 51.5 in September, which was the best showing since May, indicating expansion in the manufacturing sector.
• The ISM nonmanufacturing index was also stronger than expected in September, indicating a broader economic improvement than many had expected.

Weaknesses

• JP Morgan’s global purchasing managers index improved but remained in contraction territory.
• On a year-over-year basis, auto sales fell 26 percent in Italy, 37 percent in Spain, and 18 percent in France. These are dramatic declines and give an indication of the severity of the economic situation in Europe.

Opportunity

• While Chinese authorities did not announce any substantial government policy changes during this past holiday week, there remains considerable speculation about the prospects for near-term government policy action that would support the economy or stock market.
• Interest rates are likely to remain very low for the foreseeable future, both here in the U.S. and globally.

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.
• The International Monetary Fund’s chief economist stated that the recovery from the global financial crisis will take a decade. If that is a correct assessment, we are not even half way through the recovery process.