The Economy and Bond Market
Treasuries were mixed this week as the short end of the curve was able to muster a modest rally while the long end sold off. Signs of an economic recovery continue to incrementally pressure long term bond yields, as the 30-year Treasury hit a four month high this week. The University of Michigan Consumer Sentiment Survey below is a good example; the trend remains up but in a choppy saw-tooth pattern, allowing for doubt to build regarding the strength of the recovery but the longer term direction is clear and the markets are sensing that.
Strengths
- November retail sales were stronger than expected, which surprised many investors as the news flow from retail companies seemed to indicate the holiday shopping season was off to a weak start.
- Wholesale inventories rose 0.3 percent in October, which is the first increase since August of 2008 and is significant because it is the first concrete sign showing that the destocking phase is over and restocking has begun. In economic recoveries this is a critical component of growth and bodes well for 2010.
- Last week, mortgage rates hit a new record low, as the 30-year fixed rate mortgage fell to 4.71 percent. This week we received news that mortgage applications rose 8.5 percent to the best level in two months.
Weaknesses
- Import prices for November came in higher than expected, combined with the rolling off of last year’s financial crisis-induced depressed prices caused the year-over-year change to increase substantially. On a year-over- year basis, import prices jumped to 3.7 percent from negative 5.7 percent for a swing of about 8 percent.
- While some measures of consumer confidence have rebounded, others have not, including disappointing results from the IBD/TIPP Poll on economic optimism and the National Federation of Independent Business small business optimism index.
- Financial market risks still abound as we recently saw in Dubai. This week it was concerns of downgrades for Greece and Spain.
Opportunity
- Expectations continue to build for growth in the U.S. in the current quarter, possibly as much as 4 to 5 percent. The global economic recovery appears to be taking hold.
Threat
- The Fed voiced concerns that by maintaining a very accommodative monetary policy it risks fueling speculative investments and potentially allowing another bubble to build.
