The Economy and Bond Market (March 11, 2013)

The Economy and Bond Market (March 11, 2013)

Treasury bond yields rose sharply this week as better than expected employment on both Thursday and Friday drove yields higher. The weekly initial jobless claims continued to trend lower and the four week average hit the lowest level since March 2008. The unemployment report released on Friday showed better than expected payroll growth and the unemployment rate fell to 7.7 percent from 7.9 percent.

Strengths

• Nonfarm payrolls increased 236,000 in February, well ahead of expectations and appear to confirm the strength seen in other areas of the economy.
• The ISM’s nonmanufacturing index hit the highest level in a year in February and the new orders component also reached a new one-year high, which bodes well for the next few months.
• Household net worth in the fourth quarter of 2012 hit the highest level since the financial crisis. This is a key milestone in repairing investors’ confidence.

Weaknesses

• The European Central Bank (ECB) lowered the eurozone economic forecast for 2013. The ECB is expecting a contraction of 0.1 to 0.9 percent. Despite this forecast, the ECB did not change monetary policy at this week’s meeting.
• German industrial orders fell 1.9 percent in January.
• France’s jobless rate hit 10.6 percent, the highest level since 1999.

Opportunity

• The Fed still remains committed to an extremely accommodative policy.
• Key global central bankers are still in easing mode such as the ECB, Bank of England and the Bank of Japan.

Threat

• The economy appears to be gaining momentum, the risk for bondholders is that this trend continues and bonds selloff.
• Inflation in some corners of the globe are getting the attention of policy makers and may be an early indicator for the rest of the world.