The Economy and Bond Market Radar (November 19, 2012)

The Economy and Bond Market Radar (November 19, 2012)

Treasury bond yields moved modestly lower this week. Foreign economic news was generally negative, while U.S. economic data was negatively skewed by Superstorm Sandy. So while the data looks bad, it is very “noisy” and most analysts are not putting too much emphasis on these reports.

The 10-year treasury bond has rallied after the election as monetary policy is likely to remain very accommodative.

Strengths

• We received encouraging news Friday out of the “fiscal cliff” summit at the White House, which implies an increased probability of a resolution before year end.
• The Chinese leadership transition is now mostly complete and removes one uncertainty from the market.
• Japan’s prime minister called elections for December which was well received by the financial markets as it is likely to usher in more simulative government policies.

Weaknesses

• The eurozone is officially back in recession, as third quarter GDP fell 0.1 percent after falling 0.2 percent in the second quarter.
• Many European countries are struggling with inflation, even as their economies contract, reminiscent of the 1970s period of stagflation.
• Economic data was generally weak here in the U.S. as retail sales fell 0.3 percent in October and industrial production fell 0.4 percent. Both were negatively impacted by Superstorm Sandy and should be taken with a grain of salt.

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

• The “fiscal cliff” is front and center on investors’ radar, but much progress is unlikely until after the Thanksgiving holiday.
• Europe appears to be on the verge of another crisis, but policy-makers continue to bicker, just adding to the uncertainty.