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Why Bonds Fell After the Philly Fed

The slowdown in manufacturing activity has been largely priced in.

This column was originally published on RealMoney on Nov. 16 at 1:07 p.m. EST. It's being republished as a bonus for readers.

The Philadelphia Fed's Business Outlook Survey turned out as expected butlower than the pre-release chatter. The index fits with the general sensebuilt up over a number of months that the moderation in economic growth,particularly in the automobile sector, is leading to weakness inmanufacturing activity. The data therefore reinforce current themesregarding economic growth and interest rates.

At 5.1, the index on general business conditions is below the long-termexpansion average of 11.0, but better than the negative readings of the pasttwo months, indicating that growth prospects might be stabilizing in thefactory sector.

Much depends on trends in the demand for goods andservices, but there is a sense that the recent moderation in inflation willgive consumers additional purchasing power. This optimism must bemoderated, however, by concerns about the impact of the housing market onoverall spending.

The details of the Philadelphia survey are weak. The new orders componentfell to -3.7 from +13.4 in October, its lowest reading since April 2003.The employment component (0.2) is at its lowest level since September 2003.

Unfilled orders fell for a sixth month in seven, indicating that the recentslowdown in orders is reducing strains on the factory sector, a factornecessary to reduce the inflation rate.

The bond market's negative response to the Philadelphia survey likelyreflects the fact that the slowdown in manufacturing activity has alreadybeen largely priced in, as the sector has been weakening for several months.

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Second, with the survey now back in positive territory, recession chatterhas diminished a bit; readings of roughly -40 were seen prior to the pastthree recessions.

Third, many understand that the Philadelphia region isbeing negatively impacted by weakness in the automobile sector, making thedata unrepresentative of the nation as a whole (the Philadelphia survey wasin negative territory for two months but the ISM showed continuedexpansion).

Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of

The Strategic Bond Investor

. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback;

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