“IT’S A RECESSION WHEN YOUR NEIGHBOR LOSES HIS JOB; IT’S A DEPRESSION WHEN YOU LOSE YOURS.” Harry S. Truman. Very true words indeed – and last week brought some market action when Fed Chairman Ben Bernanke discussed the recession, commenting that our economic recovery still faces “formidable headwinds.” The current recession we have been in has been the longest in nearly half a century.
And because negative economic comments or news causes money to flow out of Stocks and into Bonds, Bernanke’s words helped Bonds and home loan rates to improve early last week…but these improvements were short lived.
Bond prices and home loan rates responded poorly to the Treasury auctions of last week, as the Treasury instruments being auctioned off are in direct competition with Mortgage Backed Securities…and the continual record amounts of supply hitting the market requires record amounts of buying to take place as well. And remember – the Federal Reserve is winding down their Mortgage Backed Security purchasing program, so as they stretch out and ration their remaining purchases through the first quarter of next year, the reduced amount of their buying just adds to the problem.
And as with any item, when there is lots of supply and diminishing demand – Economics 101 tells us that the price of that item will subsequently go down. So as Bond prices go down, home loan rates go up – and last week saw home loan rates increase by at least .25-.375% across the board.
Also adding to selling pressure on Bonds in the latter part of last week were several bits of good economic news. First, the Retail Sales Report for November was better than expected, marking the third monthly increase over the past four months. It appears that lower prices and good deals are helping to spur some buying activity, though it remains to be seen how this will impact retailers’ bottom lines. Consumer Sentiment was also reported quite a bit better than expected.
Forecast for the Week
Last week may have been a slow one when it comes to economic reports, but the week ahead is full of action, beginning with Tuesday’s Producer Price Index (PPI) Report, which measures inflation at the wholesale level. More inflation news immediately follows with Wednesday’s Consumer Price Index (CPI) Report. Remember that inflation erodes the value of the fixed income that a Bond provides, so any signs of inflation can cause Bond prices and home loan rates to worsen.
Wednesday will also bring a read on the housing market with the Housing Starts and Building Permits Report, as well as the Interest Rate Decision and Policy Statement from the Fed, following the end of their regularly scheduled Federal Open Market Committee meeting. A change in rates isn’t expected – but any comments about inflation in the Policy Statement could rattle Bonds and home loan rates.
Also important this week is a look at the manufacturing sector, via Tuesday’s Empire State Index and Thursday’s Philadelphia Fed Report. Manufacturing reports have been all over the boards lately, but a marked improvement in either of these reports could cause Stocks to move higher, and in turn, hurt Bonds and home loan rates. Also in store for Thursday is another look at the weekly Initial Jobless Claims Report. Last week’s Continuing Jobless Claims fell to the lowest level since February, and while at first blush this decline would appear to be a good thing, it is likely that the numbers are reflective of people accepting part time or seasonal work that won’t last after the holidays.
Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. Bonds and rates worsened after last week’s Treasury auctions. I’ll be watching carefully to see if Bonds and rates can muster an improving rally this week in the face of a heavy news week.