No Recession: The Yield Curve Says So
Given yesterday’s economic numbers, suddenly the market thinks that the US is heading into another recession. Well, it’s not exactly a recession … yet. But many argue that, since housing and jobs are languishing, the economy never came out of its doldrums to begin with.
Bloomberg’s Caroline Baum wrote last week that the yield curve “says” that there will be no recession. Here’s her main point:
“With the Federal Reserve’s benchmark rate at zero to 0.25 percent and the 10-year Treasury note yielding 3.06 percent, the spread between the two interest rates is among the widest in history. It’s the reverse configuration (an inverted yield curve with short rates above long rates) that augurs recession… When the yield curve is steep, as it is now, it’s an inducement for banks to expand their balance sheets — borrow short, lend long — and increase the money supply. That bank credit isn’t growing now owes more to the hangover from a period of excess leverage and new-found religion on lending standards than any restrictive policy on the part of the Fed…A $15 trillion economy doesn’t turn on a dime. Listening to the media, you’d think that one day inflation is ready to take off and the next the economy is struggling to stay afloat.” [full story]
Mortgage Activity Down?
Of note is yesterday’s weekly mortgage application number showing the refi index was down 5.7% last week. Although it will bounce back this week, year over year the refi component of MBA index is down 26.8%, even with mortgage rates 25 basis points lower! Credit & appraisals & loan fees, credit & appraisals & loan fees.
Want Lower Rates? Be Careful What You Wish For
The ADP Private Sector Employment number only increased by 38,000 in May, far less than the 175k that was expected. But remember that the ADP number, while it grabs headlines, is of dubious predictive ability for tomorrow’s government-produced employment number. Over the last 6 months alone ADP’s initial figure has ranged from understating the gain in jobs by 5k to overestimating it by 184k!
But the ADP only started the market moving yesterday, making everyone who locked in a loan earlier in the week wish that they hadn’t. The ISM Purchasing Managers’ index fell in May, and was much lower than expected. In fact, it was the lowest reading in a year. Construction Spending increased 0.4% in April although during the first 4 months of 2011, construction spending is 8.4% below the same period in 2010.
These components, pointing to a slow economy, moved stocks lower but pushed 10-year UST note yields below 3% for the first time in 2011.
Generally speaking, a slow economy helps keep rates low – but is that what the mortgage industry really needs? Low rates help, but be careful what you wish for.
Not only do we have issues in this country, but also overseas. Granted, the public’s memory seems to be short, but the sovereign debt issues in Greece, Italy, Spain, etc. just won’t go away and definitely have an impact on worldwide markets.
Yesterday Greece once again stole the spotlight, as a possible bailout package began to take form – a deal in the 30 billion euro range was being discussed. Moody’s gives Greece a 50/50 chance of default. And still, here in the US our government continues to be a role model for us all and bicker over debt ceilings while our economy slows to a crawl.
As expected, lawmakers overwhelmingly voted against raising the debt Tuesday night.
Why would they do anything without trashing the other side of the aisle first?