The Economy and Bond Market Radar (December 3, 2012)

The Economy and Bond Market Radar (December 3, 2012)

Treasury bond yields headed modestly lower this week as the “fiscal cliff” dominated investors’ thinking. The fiscal cliff talks stalled out this week, raising the odds of an economic slowdown in the first quarter of 2013 and bonds staged a modest rally.

Strengths

• Consumer confidence continued to edge higher in November and the after Thanksgiving retail sales were generally viewed as positive.
• October durable goods orders were flat month-over-month but beat expectations for a decline.
• The European Union agreed to a 37 billion euro bailout of Spanish banks in exchange for concessions from the banks. This removes one uncertainty in Europe and is generally viewed as a positive development.

Weaknesses

• November same-store sales rose 1.6 percent, which was roughly half of the estimate going into the report. The Sandy super storm disruption was widely blamed for the miss.
• Brazilian GDP disappointed, rising 0.6 percent, well below estimates for 1.2 percent growth.
• The Bank of England warned that the bank’s loan loss provisions appear inadequate and likely will need to raise additional capital.

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. The Fed has also indicated an additional $45 billion per month in additional quantitative easing that could begin as early as December.
• 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, economist’s estimate that for every new house built, at least three new jobs are created.

Threat

• The fiscal cliff is front and center on investors’ radar but significant progress is unlikely before Christmas.
• Europe appears to be on the verge of another crisis but policy makers continue to bicker, just adding to the uncertainty.