WeeklyBasis 10/9: Thanks For The Low Rates Europe

Rates rose .25% last week as mortgage bonds sold 4 of 5 days on (weak but) better than expected economic data. Rates rise when bonds sell, and rates have now risen to lose the entire dip that came after the Fed’s September 21 commitment to keep rates low.

This rate rise comes as headlines scream record low 3.94% rates. Below is what consumers must know about rates, last week’s recap and next week’s outlook. Reminder: bond markets closed Monday.

Rate Headlines vs. Reality
The 3.94% record lows reported throughout the press are from a Freddie Mac survey released Thursdays.

The survey is for single family home loans up to $417,000, it includes 0.8% in points (aka extra fees on top of normal closing costs), and is for rates in the 3-4 business days before the day they’re reported—so those rates are expired as you read them, and here’s more critical fine print on rate headlines.

Recap Market Week Oct 3-7
Rates rose last week mostly because of these reports:

–ISM Manufacturing: September manufacturing activity measured by an Institute for Supply Management survey showed a slight expansion. The survey index was at 51.6 with 50 being the dividing line between expansion and contraction.

–Jobless Claims: Initial claims for unemployment benefits were 401,000 for the week ending October 1, up 6,000 from previous week’s revised 395,000 (was 391k). This was the second week at or below the 400k threshold—readings below 400k suggest an improving jobs picture. Still the 4-week moving average was 414,000.

–BLS Jobs Report: The Bureau of Labor Statistics reported that 103k nonfarm jobs were added to the economy in September: 137k private sector jobs added, 34k government jobs lost. Expectations were for 60k jobs created. More on jobs report.

This less-bad data led to more stock optimism and net bond selling. None of the data suggest meaningful nor sustained U.S. economic improvement, but markets continue their desperate search for anything positive.

Preview Market Week Oct 10-14
Here are next week’s economic calendar highlights with rate impacts:

September 21 Fed meeting minutes Tuesday: This may remind markets just how bad the Fed thinks the economy is, and also remind us of their commitment to buy mortgage bonds using cash flows they get from their roughly $1 trillion in mortgage bond holdings resulting from their QE1 buying from January 2009 through March 2010. Rates even to down.

$66b New Bond Supply: $66b in new Treasury securities will be auctioned into markets as follows: $32b 3yr notes Tuesday, $21b 10yr notes Wednesday, $13b 30yr notes Thursday. Given Operation Twist’s objective of shifting government debt into longer durations, the 3yr auction could be weaker but the longer durations should be ok. Rates net even on auctions.

Retail Sales Friday: Estimates for September retail sales range from 0.6% to 1.2% and the August figure was unchanged at 0.1%. This figure could be more of the ‘better but really just less-bad’ data we got last week. Rates even to up.

Europe Is Biggest Rate Factor: Rates will continue to rise and fall on each little development in the European debt crisis. The latest is that France wants to draw on Europe’s TARP-like fund to recapitalize banks and Germany wants individual Eurozone governments to lead. This misses the point that Eurozone defaults are imminent. Bank liquidity moves won’t stop defaults, they’ll just help manage liquidity problems when defaults come. But political paralysis in Europe can’t even figure out how to create a safety net. Nevertheless, next week will likely start with rates up slightly on perception of progress in Europe, then fade. Rates even.

Bottom Line For Rates:
Rates should be about even next week, perhaps slightly down if markets realize that Europe’s leaders haven’t really accomplished anything yet.