WeeklyBasis 3/12/11: Global Chaos vs U.S. Inflation & Fed Data

As predicted, rates ended last week even after big volatility caused +/-.3% intraday rate swings. Following the devastating Japanese earthquake and tsunami, mortgage bonds surprisingly weren’t Friday’s safety buy and instead sold (rates up) for four main reasons: (1) profit taking after bonds rallied huge Thursday (rates down) on a very successful 30yr Treasury auction, (2) higher inflation expectations in Friday’s weaker consumer sentiment reading, (3) Friday’s Middle East protests were far less than expected, dashing fears of Libyan violence spreading, and (4) speculation that Japanese insurers may sell U.S. bonds for recovery funds.

Factors 3 and 4 need to play out further next week, as does today’s news that European Union leaders have upped their bailout fund to $611b to buy new bonds from member countries. Existing bonds are exempt. So the plan gives debt-strapped countries a bit of help raising money, but doesn’t resolve the fundamental debt problem. Also next week’s Fed meeting and inflation reports are previewed below.

Given the instability in Japan, Libya/region, and Europe, we can’t expect the Fed to waver from zero-rate policy at Tuesday’s FOMC meeting. The next two meetings after that are April 27 and June 22, which is when we’re likely to see some shift in stance because they must acknowledge and provide some guidance about the June 30 end of their current campaign of buying $600-900b in Treasuries (QE2).

Then February business inflation (PPI) comes out Wednesday, consumer inflation (CPI) Thursday, and also a key manufacturing inflation report (Philly Fed) Thursday which is another economic growth and inflation indicator.

Far-reaching issues create another tricky market week coming, but rates will likely be net higher (on net mortgage selling) for three reasons: (1) perception that Europe’s debt crisis seems even slightly more contained, (2) less Middle East turmoil than expected, (3) higher U.S. inflation.

CONFORMING RATES ($200,000 to $417,000) 0 POINT
30 Year: 4.875% (4.99% APR)
FHA 30 Year: 4.75% (4.84% APR)
5/1 ARM: 3.5% (3.62% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) 0 POINT
30 Year: 5.125% (5.24% APR)
FHA 30 Year: 4.75% (4.84% APR)
5/1 ARM: 4.0% (4.12% APR)

JUMBO RATES ($729,751 to $2,00,000) 1 POINT
30 Year: 5.25% (5.37% APR)
10/1 ARM: 4.875% (4.99%)
5/1 ARM: 4.0% (4.12% APR)