The Economy and Bond Market (October 29, 2012)

The Economy and Bond Market (October 29, 2012)

Treasury bond yields were essentially unchanged this week as economic data was mixed, the Federal Reserve was status quo and the financial markets focused on corporate earnings announcements.

Consumer confidence continues to move higher as the University of Michigan Consumer Confidence Index hit its highest level since the financial crisis. Sentiment is improving due to lower gasoline prices and higher property values. This is an interesting dynamic as the economic headlines indicate little improvement, and in many areas worsening economic conditions. This shows the power of housing and the wealth effect it has on consumer sentiment.

Strengths

• The University of Michigan Consumer Confidence Index hit its highest level in five years and is confirmation of other similar surveys of consumer confidence.
• New home sales rose 5.7 percent in September, while the months’ supply of new homes hit a seven-year low.
• Third-quarter GDP rose 2 percent, in line with expectations and a modest improvement over the second quarter.

Weaknesses

• Capital goods orders in September fell 10 percent on a year-over-year basis and have been in a declining trend for months.
• On a related note, Caterpillar lowered its 2012 outlook for the second time this year, citing European weakness.
• Spain’s unemployment rate hit 25 percent in the third quarter, the highest since 1976.

Opportunity

• There remains considerable speculation about the prospects for near-term government policy action in China 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.