Rate Watch #776 The Economy. Mortgage Rates.
May 20, 2011
by Dick Lepre
[email protected]
www.loanmine.com
The Technicals
Daily is bearish finally. Weekly is bullish. Monthly is bearish becoming neutral. The technicals are pointing to something most counterintuitive. Once the daily bearish cycle plays out we may see Treasury yield driven to the lows of last year. This is counterintuitive because it would coincide with the end of QEII and with the Fed no longer making purchases through POMO (Permanent Open Market Operations.) We have a market in which the biggest buyer has left the room, yet the techs are calling for higher prices and lower yields. Makes no sense. Right? The way in which this could play out are: 1) default on some Eurozone debt 2) the stopping of expansion of money supply will help pop the commodity bubble and the money being "invested" in commodities gets invested in Treasuries especially if GDP growth is slow casting concern about equities. But I am speculating. Let's see how this plays after the Fed exits POMO.
Jim Grauer (StoMaster) has a description as to how these techs can be used by mortgage professionals and borrowers. The detailed narrative may be found daily at StoMaster. Jim understands the techs as well as anyone whom you may see commenting in the media. He has been doing this for about 25 years and is capable of reading the technical patterns in the context of what they have indicated in the past. Most other technical analysis is much more simplistic.
Analysis
The techs are forecasting a bullish market for Treasuries in the next couple of months which may send Treasury yields and mortgage rates back down to the lows of last year. This is not a belief which is mainstream but it is what I see from the techs.
The Economy and Rates
I did not have time this week to write one of my lengthy discourses on the economy so let's just take a brief look at the signal from the techs because I find this most interesting.
Recent fundamental data show that economic growth has slowed. This is despite massive deficit spending and QEII. What we have seen recently with the bond techs is strong indication that investors are dubious that we are in a recovery which is anything other than meager. Also the dollar has regained strength popping the commodity bubble. It may becoming apparent that what the Fed has really supported is equities. Bernanke most definitely realized that there was value in pumping up equity prices because this generates a wealth effect making people feel better (and more disposed to spend) because they have regained some of the losses in their equity positions.
The monetary policy of the Fed, including paying banks interest for the excess reserves parked at the Fed has served to halt the interbank market and discourage lending. Add to that the constant barrage from politicians blaming banks for whatever and you have an economy slowed for lack of lending. Before it thinks of raising rates, perhaps the Fed should stop paying interest on excess reserves and allow the interbank market to return. The fed will have a much tougher time keeping short term rates on target if it allows those excess reserves to trade on the interbank market and "yes" that entails risks but the current zombie state of bank lending is unhealthy and deterring economic growth.
Dick Lepre
RPM - SF
1400 Van Ness Avenue
San Francisco, CA 94109
DRE License # 01143973
NMLS Individual ID 302379
California Department of Real Estate - real estate broker license #01201643
[email protected]
Web site: www.loanmine.com
Blog: economy.typepad.com
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