The Economy and Bond Market Diary (October 11, 2010)
In a repeat performance from last week, Treasury bonds rallied, sending yields lower as expectations continued to build for an additional round of quantitative easing. The chart below depicts the 10-year Treasury yield hitting new 52 week lows.
Strengths
- Quantitative easing appears to be a foregone conclusion as weak employment numbers likely secured its implementation at the next Federal Open Market Committee meeting on November 3.
- The Bank of Japan cut interest rates to essentially zero and announced a $60 billion quantitative easing plan.
- The ISM Non-Manufacturing Index rose and indicated expansion as the export component hit a three-year high.
Weaknesses
- Employment data remains weak as September’s nonfarm payrolls fell 95,000.
- Factory orders fell 0.5 percent in August.
- The U.S. dollar continued to fall in anticipation of the Fed’s quantitative easing program.
Opportunities
- Inflation is unlikely to be a problem for some time and this gives central bankers and other policy makers around the world room for expansive policies.
Threats
- Europe is looking much better than expected and possibly presents an upside risk to the global economy, implying central bankers may need to change course quicker than expected.
