The Econ­omy and Bond Mar­ket Radar (Jan­u­ary 9, 2012)

Long-term trea­suries sold off this week send­ing yields higher as; once again, the schiz­o­phrenic mar­ket gyrates up one week, down the next, for over a month.

The sell off in trea­suries this week could best be attrib­uted to bet­ter than expected eco­nomic data. While there remains con­cern sur­round­ing the ulti­mate out­come of the cur­rent Euro­pean finan­cial cri­sis, the mar­ket was able to put that anx­i­ety to the side this week. The chart below depicts the JP Mor­gan Global PMI index which hooked up in Decem­ber and is back into expan­sion ter­ri­tory. This is an inter­est­ing devel­op­ment as sen­ti­ment remains sour but the eco­nomic data is giv­ing rea­son for optimism.

Strengths

• The unem­ploy­ment rate fell to 8.5 per­cent as non­farm pay­rolls expanded by 200,000 in December.
• The ISM man­u­fac­tur­ing index increased more than expected and posted a solid gain in Decem­ber. One par­tic­u­larly encour­ag­ing sign is the new orders sub-component hit the high­est level since April.
• Fac­tory orders in Novem­ber rose 1.8 per­cent and is another fac­tor con­firm­ing the strength in the man­u­fac­tur­ing sector.

Weak­nesses

• Overnight deposits with the Euro­pean Cen­tral Bank hit a record high as banks are still unwill­ing to lend to each other in the overnight inter­bank mar­ket. This indi­cates sig­nif­i­cant lack of con­fi­dence in the Euro­pean bank­ing sector.
• The euro fell to the low­est level in more than a year as investors con­cerns build regard­ing the ulti­mate out­come in Europe.
• France plans on increas­ing its value-added tax (VAT) in the next few months even as a rate increase just took effect Jan­u­ary 1.

Oppor­tu­ni­ties

• After sur­pris­ingly good eco­nomic news recently, next week’s Decem­ber retail sales data will be the key eco­nomic data point to watch for con­tin­ued confirmation.

Threats

• The sit­u­a­tion in Europe remains extremely fluid and neg­a­tive news is almost expected at this point, unfor­tu­nately it is polit­i­cally dri­ven and dif­fi­cult to pre­dict out­comes and ramifications.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

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