WeeklyBasis 06/30/08: Rates Volatile on Inflation-Recession Tug of War

Fixed and ARM rates open this week approximately even over last week. We had a run up in rates in the two weeks leading up to last Wednesday’s FOMC announcement that they were holding the overnight bank-to-bank Fed Funds Rate at 2%, but increased credit crunch pressures have weighed on the market. As stocks have sold off, bonds have benefited, which pushes yields (or rates) down.

This tug of war will continue this week. If European inflation pressures are seen as spreading here, rates will rise. If jobs and manufacturing data is weak, rates will drop. Most of this action comes Thursday: The European Central Bank may hike rates that day, the June jobs report is released, as well as the ISM Manufacturing Index.

If the ECB hikes their overnight bank-to-bank rate from 4% to 4.25%, it will put additional pressure on the Fed. If the Fed doesn’t follow suit, it will further weaken the dollar, and a weak dollar raises prices for imports and oil which is inflationary. Also as I’ve said, a weak dollar can cause foreign investors to sell dollar assets. When they dump stocks, it’s bad economic growth overall. When they dump bonds, rates rise.

Weak ISM activity would show that economic output is slowing and rates would drop. The jobs report estimates call for 50,000 jobs lost in June, and a -0.1% slip to 5.4% unemployment. The economy has lost 324,000 jobs through May, and May’s .5% jump in unemployment (to 5.5%) caused rates to drop last month. If unemployment rises instead, rates will drop again.

Same strategy goes for locking rates as I’ve had all year: it’s a trading approach and macroeconomic rate forecasting is out of favor due to uncertainty. So we pick rate ranges based on 25-200 day moving averages and lock when rates are within that range. My macro position is hawkish on inflation, and if borrowers like rate ranges now, then now is the time.

My best wishes to everyone for Independence Day (and let’s hope Will Smith’s new movie isn’t as bad as all the critics say!)…

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.25% (6.39% APR)
15 Year: 6.0% (6.15% APR)
5/1 ARM: 6.25% (6.38% APR)

Super-Conforming ($417,001 to $729,750 cap by county) – NO POINTS
30 Year: 6.5% (6.65%)

Jumbo ($650,000 – $1,000,000) – NO POINTS
30 Year: 6.875% (7.025% APR)
7/1 ARM: 6.5% (6.64% APR)
5/1 ARM: 6.25% (6.40% APR)