The Economy and Bond Market Radar (January 7, 2012)
Treasury bond yields rose sharply this week as the minutes for the December FOMC meeting indicated that some Fed officials wanted to slow or stop the $85 billion in monthly quantitative easing by mid-to-late 2013. The hawkishness of this news surprised the market, and was the primary catalyst for the sell-off. The 10-year treasury yield hit the highest level since May 2012.
Strengths
- The fiscal cliff came down to the wire but policymakers were ultimately able to reach consensus, at least for a month or two.
- December auto sales capped off a strong year, as full year sales rose 13.5 percent to 14.5 million units, which are the best results in five years. December retail sales positively surprised, rising 4.8 percent versus a year ago. As has been the trend in recent years, the low-end and high-end retailers fared the best.
- China’s manufacturing PMI was 50.6 in December, matching November’s report, but continues the trend of stronger data out of China in recent weeks.
Weaknesses
- Unemployment rose to 7.8 percent in December. Non-farm payrolls rose by 155,000, which was in-line with expectations but not enough to suspect a significant change to the jobs picture.
- Construction spending fell 0.3 percent in November, which was the first decline in eight months.
- Eurozone manufacturing PMI fell to 46.1 in December, down from 46.2 in November.
Opportunity
- While some Fed members expressed concerns over continued quantitative easing, the Federal Reserve still remains committed to an extremely accommodative policy until the economy improves.
- Globally, central banks are increasing their stimulative policies, as Japan’s recently- elected prime minister vowed to take on deflation and deflate the Yen.
Threat
- The fiscal cliff is over for the time being, but the debt ceiling and federal spending debate will be the next challenge for policymakers over the next few weeks.
