October 29, 2010

Market Wrap: for the week ending 29-Oct-2010

Weekly Snapshot 
• Real GDP in the US grew at an annual rate of 2.0% in the third quarter of 2010 (ESA)
• US consumer sentiment worse than expected in October, lowest in 11 months (Reuters)
• Euro area seasonally-adjusted unemployment rate was 10.1% in September (Eurostat)
• Britain’s economy grew by 0.8% in Q3, or 2.8% compared with a year earlier (Economist)
• The Euro zone economic sentiment index  rose to a 34-month high in October (Economy.com)
• Unemployment in Germany fell below 3 million in October, for the first time in 18 years (FT)
• Bank of Japan held its key overnight call rate unchanged and cut its growth outlook (Marketwatch)
• US durable goods orders in September 2010 rose 3.3%, to $199.2 billion (ESA)
• Industrial new orders up by 5.3% in Euro area (Eurostat)
• US consumer confidence in October increased to 50.2 up from 48.6 in September (NBER)
• Home price increases slow down in August according to the Case-Shiller Home Price Indices (S&P)
• For the first time ever, inflation-protected Treasury bonds sold with a negative yield (WSJ)
• US existing home sales rose 10% in September; median price fell 2.4% from a year earlier (Bloomberg)
• The G-20 agreed to move towards more market-determined exchange-rate systems (Bloomberg)

Weekly Market Barometers    
st-2010-1029   fx-2010-1029

Chart Of The Week
The US Treasury sold $10 billion of five-year Treasury inflation protected securities (TIPS) at an auction this week with a yield of negative 0.55%.  Granted, these government bonds are indexed to inflation and their par value rises based on the consumer price index.  But with a negative 0.55% yield, it may take a while just to break even.  Based on what happened during this week's auction, many investors must fear a substantial risk of much higher inflation in the next 5 years.  In their view, there is a high probability that these securities will still provide a positive return before they mature in 5 years, despite the current negative yield.

That said, I cannot think of any reason why someone would pay to lend his money even if it were just for a few months - and least of all to lend your hard-earned dollars to the government. 

This one should be filed under:  Things that make you go hmmm...

source: http://research.stlouisfed.org

Recommended Read 
Just in time for Halloween, the Bond guru Bill Gross issued a rather spooky article warning investors that the great three decade long bull market in Bonds is about to end.  Please consider:  Run Turkey, Run

His sentiment is shared by a large number of investors, namely those who lined up this week to pay the US government to take their money (see chart above).  With QE2 looming upon us, one would think that inflation must is coming to a household near you rather soon, if it hasn’t arrived already. 

Some caveats though.  It isn’t the first time that Bill Gross has called the end of the Bond rally before and was mistaken.  You can read up on his two most recent missed calls on Calculated Risk.

Then there’s this perhaps much bigger concern that the US may follow in the footsteps of Japan and endure at least another decade of sub-par growth and deflation. 

Here’s yet another angle:  As long as the government controls the determinants going into the consumer price index, stated inflation will likely be low for an extended period of time.  The real cost of living in US dollar terms however, is not going to stay at present levels much longer.  The effects of that are already apparent in higher commodity prices, stubbornly high gold prices and a loss of real purchasing power in US Dollar terms.  Do you still want to pay for the “privilege” of lending money to the US government?

Recommended Video 
In view of the widely anticipated QE2 which may be confirmed at the next FOMC meeting, here’s a good explanation of what happens when Uncle Ben goes shopping.

Uncle Ben goes shopping from Marketplace on Vimeo.


Good luck and good investing!

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