THE BASIS POINT

Short Memory In Rate Markets: Egypt Chaos Takes Back Seat To U.S. Business Inflation. For Now.

On Friday, a revolution and resulting chaos in Egypt caused U.S. rates (on 30yr fixed loans up to $417k) to drop .125% but Monday rates rose that amount, back to 4.875%, as mortgage bond traders re-focused on U.S. business inflation. The Chicago Purchasing Managers Index is one of many monthly manufacturing surveys done across the U.S. and showed the highest manufacturing inflation since July 2008. It’s the latest to indicate inflation pressure for businesses, and rates go up when inflation is a threat. Tuesday, the Egypt revolution may boil over, and the rate volatility will continue. It takes a strong stomach to withstand daily rate swings as traders sort out economic data and bigger issues like Egypt, but rates ultimately track with broader economic trends, which we’ll discuss Tuesday in our 2011 Rate Outlook.

Continuing Monday’s recap, Personal Income for December was the same as the last 9 months, and savings is at 5.3% (table below with all consumer income and spending details). Also the Fed’s favorite consumer inflation measure was tame, and within their 1-2% comfort zone: the December Personal Consumption Expenditures Index was up 0.3% from November 2010 and 1.2% higher than December 2009. Excluding volatile oil and food costs, “Core” December PCE was unchanged from November and .7% higher than December 2009.