THE BASIS POINT

Why Rates Are Up Today Despite Weak Manufacturing, Rising Jobless Claims

Huge news day with all key data summarized (including charts) in today’s Fundamentals report. Despite rising jobless claims and contracting manufacturing activity, rates are up today for 3 main reasons:

(1) Consumer inflation is higher. Rates rise when mortgage bonds sell, and they’re selling today partly because consumer inflation is higher. Inflation makes the future income a bond pays to an investor worth less, so bonds tend to sell on inflationary threats.

(2) Despite Empire State (NY) region manufacturing contracting a forth straight month and Philadelphia region manufacturing contracting three of the last four months, the inflation readings in both of those surveys (Empire State and Philly Fed) were both creeping up after dropping recently. Same inflation-fear theme as noted in #1 above applies. Inflation notes from both surveys summarized in Fundamentals.

(3) New assistance for Eurozone banks is causing stocks to rally and bonds to sell. More details in Fundamentals.

Still, the root theme of today’s data is sustained economic weakness which generally supports low rates via higher demand for fixed income investments like U.S. Treasuries and mortgage bonds.

To further support this point, it’s also worth noting a conversation I had with Dick Lepre just now about #3 above. His point is that this aid for Eurozone banks is an acknowledgement that Eurozone defaults are imminent. Today’s move isn’t going to stop any defaults, it’s just going to help manage the inevitable liquidity problems Eurozone banks and broader global markets will see as the European debt crisis plays out.

Net result: flight to quality will continue and U.S. Treasuries and mortgages will likely benefit, keeping U.S. rates low.

Fundamentals: All Today’s Stats/Charts

And here’s another good piece on the topic. Last paragraph on Europe gets at what I was talking about above:

Questionable Stock Rally (CreditWritedowns)