WeeklyBasis 3/26/11: Rates Likely Up 2nd Week

Rates ended last week up .125% after being even for three weeks. Poor new and existing home sales, rattled consumers, and the Portugal flare-up in Europe’s debt crisis last week would normally cause rates to drop as mortgage bonds rally. But bonds lost ground as investors moved to stocks, pushing the S&P 500 up 2.7% to 1313.80, the biggest weekly gain in two months.

Stocks shook off worries about Japan’s post-quake aftermath and violence in Libya as AT&T’s T-Mobile bid renewed M&A hopes and early Q1 profit reports created a bullish outlook. Earnings reports pick up steam next week and will confirm the speculation. It’s also a huge economic data week. Below is a preview of the week, average rates today, and the rate outlook.

Preview of Inflation, Jobs, Home Prices
Monday brings February readings on pending home sales, consumer income and spending, and the Fed’s favorite inflation measure. The Personal Consumption Expenditures Index (PCE) is expected flat at 0.2% if food and gas prices are excluded. The Fed prefers to look at this “Core” number when analyzing inflation, because they think food and gas are too volatile to count in the short-term. But if the non-core “headline” numbers for the month and year are meaningfully higher, bonds would sell and rates would rise.

Tuesday is the S&P Case Shiller Home Price report for January. December’s report released last month showed nationwide home prices were down 2.4%, the seventh straight monthly loss. A continuation of this trend might help bonds/rates as it would signal a tougher road to recovery.

Wednesday and Friday are the March jobs reports from ADP (+210k new jobs expected vs. +217k Feb) and the Bureau of Labor Statistics (+185k new non-farm jobs expected vs. +192k Feb). The 8.9% unemployment rate isn’t expected to move much, but jobless claims have been decreasing for the past month, so Friday’s official BLS number could beat expectations.

Thursday and Friday are two Institute for Supply Management manufacturing surveys, which will most likely show a growing inflationary trend. This applies upward rate pressure because bonds sell on fear of inflation eroding the buying power of a bond’s future income.

Monday through Wednesday we’ll see $99b in new Treasury securities auctioned into bond markets: $35b in 2yr Notes Monday, $35b in 5yr Notes Tuesday, $29b in 7yr Notes Wednesday. Auctions two weeks ago went swimmingly, but new supply may not be so welcome in the heavy data week coming.

Bottom Line
Even if PCE consumer inflation is flat, rising business inflation will be confirmed. This plus $99b in new bond supply, expectations of a hotter job market, and higher earnings/stocks may bring higher rates on net bond selling ahead of Friday’s jobs report.

Rates shouldn’t spike as Europe debt trouble and weak U.S. housing keep a lid on bond selling, but we could see rates up a second straight week.

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: 3.75% (3.87% 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: 4.125% (4.24% APR)