The Economy and Bond Market (November 26, 2012)
Treasury bond yields moved higher this week on low holiday volume and continued strength in housing data.
Strengths
- Housing starts rose to their highest rate in more than four years in October, suggesting the housing market recovery was gaining steam, even though permits for future construction fell.
- The index of U.S. leading economic indicators rose in September by the most in seven months, boosted in part by a jump in permits for home construction that is helping underpin the expansion.
- Consumer confidence reached a six-month high last week as more Americans said it was a good time to shop, another report today showed.
Weaknesses
- Building permits fell 2.7 percent to an 866,000-unit pace in October after jumping 11.1 percent the prior month, in line with expectations.
- Hungary’s credit rating was lowered to two steps below investment grade by Standard & Poor’s on poor growth prospects, echoing further bad economic news in the region.
- European Union leaders failed to reach an agreement for the next seven-year budget, as the disagreements between rich and poor countries continues to delay an appropriate response to the euro debt crisis.
Opportunity
- The Federal Reserve has targeted housing as a channel to boost U.S. growth, announcing in September that it would buy $40 billion in mortgage-backed securities per month until the outlook for employment improved substantially.
- Homebuilding is expected to add to gross domestic product growth this year for the first time since 2005. Though home construction accounts for only about 2.5 percent of GDP, economists estimate that for every new house built, at least three new jobs are created.
- 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
- The fiscal cliff is front and center on investors’ radar, but significant progress is unlikely until later next month.
- Europe appears to be on the verge of another crisis, but policy-makers continue to bicker, just adding to the uncertainty.
