WeeklyBasis 6/11: Another New 2011 Rate Low

Rates set a new 2011 low Wednesday, June 8 then rose slightly as mortgage bonds sold off of overbought levels—rates rise when bond prices drop in a selloff. Still, rates ended the week very low as uncertain U.S. recovery drives investors into bonds.

Rates dropped early last week because: (1) a weak jobs report weighed on markets, (2) bonds liked the 10yr and 30yr Treasury auctions, (3) Bernanke said recovery is “frustratingly slow,” (4) jobless claims rose. Below is a preview of next week’s data and rationale for why rates should be even to slightly down.

It’s a big week for measuring the strength manufacturers and home builders, the mood of consumers, and the level of business and consumer inflation.

Consumer mood: Monday is May retail sales, Thursday is weekly jobless claims, and Friday is June consumer sentiment. Retail sales will likely be flat, and consumer sentiment may improve a bit as gas prices have come down. Net neutral for rates.

Manufacturing activity: May’s manufacturing surveys showed weaker activity and higher prices paid. Wednesday and Thursday are June New York and Philadelphia area manufacturing outlook surveys, and it’s unlikely that both surveys will show markedly increased activity and relief from rising prices. Bonds rise, rates drop.

Homebuilder activity: Wednesday is the June National Association of Homebuilders housing market index and Thursday is May housing starts and building permits. Theses numbers have been disappointing and no new evidence suggests a meaningful improvement. Bonds rise, rates drop.

Inflation: Tuesday and Wednesday are May Producer and Consumer Prices, and while the debate always rages that food and oil prices are an issue, bonds are unlikely to trade that belief next week, especially since oil dropped in May. Neutral to better for rates.