The US economy grew at an annual rate of 2.0% in Q3. We forecast an average rate of growth of 2% over the next three to four quarters, which is a pick-up from Q2’s disappointing 1.3% pace and Q1’s dismal 0.4% growth rate. Temporary headwinds such as higher gas prices and the Japanese earthquake in the spring have faded, and consumer spending activity – particularly on durables like autos – rebounded during the third quarter. The pace of consumer spending increased to 2.4% from just 0.7% in Q2 when spending on durables actually contracted.
Will growth continue? Downside risks stemming from the euro area crisis remain. Although exports to Europe comprise just 23% of total US goods and services sent abroad, it is unlikely that the US has fully “decoupled” from Europe. We expect a contraction in euro area economic growth in 2012 but while this recession will have a meaningful impact on US growth in the next 6-12 months, we do not think it will be calamitous. However, the interconnected nature of the global financial system means credit growth will be impeded by an adverse outcome to the euro area crisis beyond the shores of Continental Europe. Bottom line: forward-looking indicators point to continued moderate US economic growth. Global challenges remain a key risk. Progress on the unemployment rate will remain slow but the economy is growing. For now, this puts the Fed in “wait-and-see” mode with regard to additional unconventional easing (e.g., QE3).
Florida Local Government Investment Trust
The Florida Local Government Investment Trust Short-Term Bond portfolio posted a return of -0.08% in November versus a benchmark return of 0.05%. For the fiscal year beginning 10/1/11, the portfolio has posted a return of 0.13% versus a benchmark return of 0.14%.
Sectors that trade at a spread over Treasuries were back in fashion in October, with corporate credit as the star of the show. In November, however, events in Europe continued to drive the financial markets, causing sectors that trade at a spread to Treasuries to underperform. 1-3yr Corporate bonds rated A or Better returned -0.50%, erasing their gains from October. 1-3yr Treasuries returned 0.05%, as did U.S. Agency 1-3yr debt. Short agency mortgages returned -0.21%. The front end of the treasury curve remained very stable, with the 2yr note moving between a low of 0.21% and a high of 0.27%, but essentially ending the month unchanged at 0.25%.
We continue to maintain the portfolio’s duration, and look for opportunities to add, all while maintaining S&P’s AAA rating.
Florida Trust Day to Day Fund
In November, the SEC yield on the Fund was 0.19%. While we had been (and continue) looking for opportunities to purchase as much fixed-rate credit as possible in the portfolio for the yield advantage over other securities, the floating rate securities in the portfolio have driven the rise in yields. 3-month LIBOR (the rate off of which many of the portfolio’s floating rate notes are based) rose from 0.43 at the beginning of the month to 0.53 at the end. For reference, 3-month LIBOR at the end of June 2011 was 0.25%. The portfolio remains extremely liquid with 35% of the portfolio invested in overnight and short-term securities. Additionally, over 70% of the portfolio is invested in government or government guaranteed securities.