I managed to pull off another week of doing this report from my laptop in my home city, go figure. Unfortunately, the Fed was not up to the challenge of maintaining low interest rates through their persistent “buyer of first resort” strategy, and mortgage rates rose about .25% as a result.
Last week was a short week, which had few economic reports and was full of news. Of course, who could miss the inauguration of now president, Barack Obama, and the ensuing market chaos that followed. There were plenty of negative earnings reports to be seen, as were a few good ones, and that kept selling pressures in the stock markets. As the data flowed, once again we saw favorable news for mortgage rates, yet they rose. Why?
In one word, inflation. What? How could traders be worried about inflation when CPI and other indicators, not to mention Bernanke, all are stating inflation is “moderating” and under control? The answer is that while inflation may appear to be under control, government actions and the continued bailouts have thrown more lethargic rabbits into the system that will soon be waking up. The evidence is so clear that even Fed Governor Frederic Mishkin made the following statement…”inflation could come to the forefront, given all of the government programs…once the economy recovers, liquidity must be taken out of the markets“, showing his concern about the multiplying rabbits and the coming results.
This week will be chock full of data, so you can expect some solid basis for the direction of mortgage rates to appear by week’s end. Here is this week’s scheduled data…
- Monday: Existing Home Sales (10:00), Leading Indicators (10:00), 3-month Bill Auction (11:30), 6-month Bill Auction (11:30), 20-year TIPS Auction (1:00)
- Tuesday: Case Shiller HPI (9:00), Consumer Confidence (10:00), 4-week Bill Auction (1:00), 2-year Note Auction (1:00)
- Wednesday: MBA Purchase Applications (7:00), EIA Petroleum Status Report (10:30), Fed Rate Decision (2:15)
- Thursday: Durable Goods Orders (8:30), Jobless Claims (8:30), New Home Sales (10:00), 5-year Note Auction (1:00), Money Supply (4:30)
- Friday: GDP (8:30), Employment Cost Index (8:30), Chicago PMI (9:45), Consumer Sentiment (9:55)
As you can see, there will be added selling pressures as more Treasuries are auctioned this week, including the 5-year T-Note on Thursday. The Fed decision this Wednesday will also play a key role in the direction of mortgage rates, as will Friday’s data, which will likely show a continued weak economy. Chances are the term “stagflation” will be reentering the media this week, or at least soon.
On the technical side of things, mortgage backed securities have fallen below their 25-day moving average, but are holding on to some further support. That places them in a narrow channel between support and resistance which will likely break this week, one way or the other. Stochastic indications are favoring MBS being oversold, which is good for the outlook if you want lower mortgage rates. So, the picture presented by the charts is that mortgage rates will likely improve slightly before market forces drive them higher.
My expectations for this week will be that we will see mortgage rates get a notch or two better and then start climbing higher again, all of which could happen this week, that is if added supply doesn’t drive them higher without the correction.
How very frustrating to watch the government throw money at a problem that, instead of fixing, is only prolonging the inevitable. Let’s hope it works itself out quickly.
Robert, Isn’t deflation a bigger worry at the moment than inflation??
I agree the Government is just getting in the way and needs to let the markets just work it out.
Robert,
The idea now seems to be to just get the economy back on its feet no matter what the consequences are. Once its running okay, so they prefer to think, then they can tackle the perceived inflation issue. We can debate all we want but endless debate won’t solve anything. We need action, inaction will only hurt.
This is why the government shouldn’t be allowed to get so deeply involved in the markets. It’s always either too much help, or not enough. There’s never going to a perfect balance. At what point do you decide that the FED can step back and let things continue on a normal course?
@Lenda – It is very frustrating to see the government continue to throw money at the problem when they have already seen their efforts have been futile.
@Jeff – One could easily be swayed to that belief, but remember that CPI and other sets of data are laggers, meaning what is happening right now will not show up for 3-6 months. The fact that Mishkin is publicly stating some concerns means that at least he is starting to see inflationary pressures returning.
@Esko – I agree that action may be needed, but inaction is better than action in the wrong direction. Think of the economy as a pendulum, always wanting to return to the center. Now think of the government’s action as pushing the pendulum further and further from the center. What do you think is going to happen when they finally let go?
Only time will tell for sure if they will be able to slow down the pendulum effect enough. If they can’t, and that is what I am thinking, then watch out.
@Ling – You must have added your comment while I was writing my previous one. Sorry I missed it before.
As for when the Fed should stop, or should have, I would just say back before their actions became moral hazard. As for now, the problem is they have started down a road from which they may not be able to turn around.
It’s funny because coming from England, I always thought that the US was the shining example of how the market forces were the determining factor in the success of any product. Now that the Government has stepped in to try and rectify the situation it seems that things are so different to Europe after all!
Gary
It seems that all these bail outs, stimuli packages, and government interferances are keeping the housing bubble artifically afloat, when really by just letting it work its own way out, everything might end up settling much more quickly. We can only hope that it doesn’t get too much worse, but really whatever has to happen for it to level out will happen, regardless of how much money we throw at the problem.
It will be interesting to see if this tax credit bill for home buyers comes through on Tues and what effect that has on home buyers