A Better Start This Morning With Mortgage Rates

A slightly better start this morning as it has been ugly the past few days.  Weekly claims were as expected with a slight revision upward with last week’s claims.  Nothing in the report got much attention. Also the final Q1 productivity came out – and although some may ignore the report as old data, the decline in productivity and increased unit labor costs is troubling. Output as measured in this report fell 1.6% in the quarter at the same time that hours worked rose 1.6%. Adding to labor costs was a sharp 3.3% rise in compensation. Incomes up, production weak - not a good thing for the inflation outlook, but not a concern yet. Q2 is where the cheese binds.

Tomorrow Greece will make their payment as required - it is not the payment tomorrow but what Greece will have to do to satisfy the IMF and EU leaders in order to secure more bailout funds. Future payments required this month shows that at this moment Greece has no way to make them. Markets recently have eased concerns that a default is imminent, but have not discounted the real possibility.

The recent spike in global interest rates started Monday in Germany.  Two issues lead the reasoning - Monday European flash core CPI jumped higher and less momentary concern that Greece would default tomorrow. The increase in the inflation rate removed a lot of fear that in Europe’s economies prices would deflate and send the region into a spiral of declining prices taking the world along with it. Here in the US once the 10yr bund began heavy selling our bond markets followed. It is widely believed that if Greece does default and leaves the EU it will cascade into other countries and the global markets. It is and will be that moving target all through this summer. Interest rate volatility will be excessive through the summer.

As of 10:00AM - we are seeing the 10yr at 2.31% which is 5BPS from its open of 2.36%, and MBSs are a positive 29BPS.  Employment tomorrow and in the absence of any news from Europe, the bond and mortgage markets will trade quietly today compared to the rout since Monday – even though I expect some position squaring to push prices up.  

I cannot say it enough though, the high level of uncertainty (volatility) will continue. After deciphering what I said last night and looking through all the reports this morning, maybe these rates have increased too quickly - and the shocking and unexpected substantial increase in rates triggered by the German 10yr bund. Probably time to consolidate but it will not change the direction that rates will go higher – I am now seeing that most are saying the new target for the US 10yr note rate is 2.50% - but I disagree as that is too early to state this right now. Christine Lagarde (IMF) said the IMF is lowering the growth outlook for the US and said the Fed should withhold rate increases until 2016 (hmmm?  - I wonder if they have been reading my reports as I have stood fast by this prediction).