Last Week’s Highlights:
Stocks: Boost from GDP, then flat
VIX Equity volatility falls from 20 to 17
Bonds: 4% mark breached on 10-year Treasury
Oil: “Retreat” to $127
Regular Gas Hello $4+ per gallon
Dollar: Small rally on GDP, 1.55 euro
GDP Revised to 0.9% in final Q1 data
Economics This Week:
Date Item Est. Comment
6/5 Employment 5.1%/-52K Slight rise in unemployment seen
Hard to believe that it’s already June and it’s been a year since all the bad news began on Wall Street. But here we are a year later, and conditions appear to be getting better. The economy is showing signs of mending itself with better GDP, the banking system hasn’t had a blow up in months, the Fed thinks conditions are stable enough to suggest no more rate cuts, and the dollar is showing signs of improvement. Add to that a nice retracement in oil prices from $135+ to about $127 per barrel (can you believe we think $127 is a good retracement?) and you have all the makings of stability. Of course, we’re also at the official start of summer and of course the start of the hurricane season, but hey – that’s what all those high insurance premiums are for, right? Maybe, just maybe, this summer will allow us some down time to digest what happened last year – or is that just wishful thinking?
Flight Rally at an End?
For months and months, the 10-yr Treasury has firmly held near 3.5% as the market’s “flight to quality” trade held firm during the market dislocations of 2007 and Q1 2008. Last week’s yield action may have finally signaled the end to the “flight” trade as the yield on the 10-yr moved over 4% for the first time in six months. The move over the magic “4 handle” really started in March when yields bottomed at 3.3%, in the midst of the market crisis and Federal Reserve easing. A quick look at the yield chart below shows the obvious uptrend since the bottom.
There are plenty of reasons why the move higher in yields is taking place, including rising inflation, signs of a recovering economy, the end to rate cuts by the Fed, and simply an unwind of speculative trades. This latter point seems to be the talk of the trading scene over the last few weeks as many big shops are supposedly in the process of reversing their heavy long Treasury positions. One of the key discussion points has been the fact that economic data has been steady and not showing further deterioration. This was confirmed in last week’s upward revision in Q1 GDP to a 0.9% increase. As we have been saying for some time, the resiliency of the economy from strong export growth could allow the US economy to barely skip a technical recession this time around.
Source: Briefing.com
One can also look to Fed action as a source of the shift in the long bond rates. Just a few months ago, the speculation was that the Fed would be pouring on the liquidity indefinitely. Today, the fed fund futures suggest that the FOMC meeting later this month will produce a decision not to cut rates (see chart). The implied probabilities now suggest over a 90% chance the Fed will not cut rates and hold the fed funds rate a 2.0%.
While the end of Treasury rally due to good economic news is generally a good sign, it may be more ominous for a recovery in housing. We all know that mortgage rates are keyed off the 10-yr rate and with a rising Treasury, we’ll most likely see rising mortgage rates across the board. Evidence of this can already be seen in the Bankrate.com 30-yr fixed nation average reaching toward 6% after bottoming under 5.4% about this time last year.
Source: Bankrate.com
Source: Cleveland Fed
Lighter Side: Dealing with high gas prices & tight parking at the same time!
Source: Internet
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