May 7, 2011

WeeklyBasis 5/7: Economy Today vs. 1 Year Ago

May 7, 2011

WeeklyBasis 5/7: Economy Today vs. 1 Year Ago

Rates set new 2011 lows last week after mortgage bonds rose a third straight week. Previous lows were set March 16 in the aftermath of Japan’s earthquake Libya’s revolution. New lows are the result of unstable economic growth, jobs and housing data. Bonds are a safe buy when uncertainty sets in, and rates drop when mortgage bond prices rise on “flight to safety” buying.

Below is a preview of next week’s reports on inflation, jobs, and consumer strength. And here’s a comparison of rates and economic factors today versus one year ago:

U.S. unemployment was 9.9% May 2010 versus 9% today.

U.S. economic growth was 3.2% (later revised down to 2.7%) versus 1.8% today (next revision may 26).

Rates on May 7, 2010 were about .25% higher than rates on May 6, 2011.

Greece riots tipped off a U.S. stock crash May 6, 2010, and today Greece still faces imminent debt default despite last year’s $158b bailout.

That last point will be a market theme early next week, and U.S. bonds and rates could benefit as investors seek alternatives to European debt.

Some upside rate risk will come from $72b in new Treasury securities being auctioned into markets as follows: $32b in 3yr Notes Tuesday, $24b in 10yr Notes Wednesday, and $16b in 30yr Bonds Thursday. New bond supply can rattle mortgage investors, causing them to sell which pushes rates up.

The accompanying graphic shows that Core inflation, measured by CPI for consumers and PPI for businesses, is under the Fed’s 2% comfort zone cap. Thursday and Friday will show us whether CPI and PPI will hold at non-inflationary levels. If they do, it’ll help stabilize rates.

Thursday’s weekly jobless claims will get special attention because they’ve spiked three straight Thursdays, and some fine print in Friday’s jobs report reflected this weakening jobs trend.

We’ll also get a read on consumer strength with April’s retail sales report Thursday.

Rates shouldn’t spike next week, but mortgage bonds have experienced a massive three-week rally, so profit taking as well as stable to better economic news may cause rates to rise slightly off extreme lows.