Market Commentary

Revised third quarter GDP is announced today.
November 24, 2009

Revised third quarter GDP is announced today.  Consensus is expecting growth to be revised to 2.8% from 3.5%, primarily the result of exports and inventories.  This data should have little impact regarding the outlook for fourth quarter growth which is now estimated to be between 2.0% and 3.0%.  What are the odds fourth quarter growth will meet the upper end of the range?

As written several times the yield curve is extremely steep.  Currently the two year treasury over the thirty year treasury (2s/30s) spread is about 360 basis points.  A spread of this magnitude is conducive for an economic recovery and a rapidly recovering banking system.

I point to the two prior recessions as evidence, the last time 2s/30s steepened by a similar amount.  For example in October 1992 the curve steepened to about 368 basis points. Similarly following the dot com bust the curve steepened in July 2003 to about 364 basis points.  In both episodes the economy rebounded.

I am not aware of another time when the curve was as steep as it is today as compared to any treasury instrument that matures within one year.  The 1s/30s is 403 basis points.

Most will accept a flattening yield curve is indicative of an expanding economy however what are the odds the Central Bank will raise hikes?  There has been a chorus of Fed officials stating that the overnight rate will remain low for an “extended period” of time.  What impact will have this upon the economy?

In my view the massive amount of corporate bond issuance is further evidence the recovery is sustainable   Event risk or bankruptcy is one of the two major issues for fixed income investing. This risk subsides in a rebounding economy.  As per Bloomberg a record $1.171 trillion in US corporate bonds have been issued in 2009 surpassing the previous record of $1.167 trillion set in 2007.  In my view what makes this record even more incredible is that the bond markets were completely illiquid until mid March.

Turning briefly to yesterday’s market action, stocks advanced again on Federal Reserve remarks suggesting the Central Bank might continue buying mortgage backed bonds after the first quarter and maintain the overnight rate at zero until “late 2010” amplified by stronger than expected existing home sales.

Last night the foreign markets were mixed. London was up 0.34%, Paris down 0.03% and Frankfurt up 0.9%.  Japan was down 1.10% and Hang Sang down 1.53%.

The Dow should open nominally higher as German business confidence rose to a 15 month high and belief that the US housing slump is leveling out. The 10-year is up 2/32 to yield 3.34%.