June 5th, 2013 10:06 AM by Mel Samick
Bonds continue to sell-off in a free-fall. The 10-Year treasury is heading towards the 2.10 percent mark, which was unimaginable at the beginning of this month when it was around the 1.62 percent mark. This abrupt market moment feels like vagaries of the weather. Those who planned to start the summer festivities with splash pool parties and outdoor grills during the Memorial weekend were in for a cold weather surprise too. Most of the U.S. economic trends were up this week, especially housing. But as interest rates rose, mortgage applications especially for refinances declined. The stock market is steadily moving up to new highs. Anyone for the Dow crossing the 16,000 mark this year?
The mortgage market is in a conundrum. On one side we need a stronger economy to fuel further improvements in the job market and increasing employment in order for home prices to continue to rise, but on the other hand the improving job market inevitably will result in higher interest rates. This week we saw mortgage rates rise for the third week in a row as a result of increasingly improving economic data. There is a willingness on the part of some FOMC members to consider winding down QE3 before too much more time has passed, possibly even as early as next month, provided the economy is producing enough growth to warrant such a change. Mr. Bernanke's answer to a question about the timing of the beginning of a reduction in purchases of MBS and Treasuries seem to suggest that September might be a more likely point. As uncertainty poured into the market, bonds sold off, and mortgage rates moved closer to 2013 highs, just a few short weeks after hitting 2013 lows. However, rates are relatively speaking, still near record lows.
Stocks seem to be on a mission to Mars. Fat corporate margins are helping to boost profits even as revenue growth is mediocre or, like this year's first-quarter, slightly negative. Margins are at historic highs, and the warning from the bears is that margins will eventually come back down to their historical averages, in what's called "mean reversion". If this happens without a counteracting rise in revenue, profits will be squeezed. Yet far from reverting, margins have gotten wider the past few years. This past quarter, net margins for the S&P 500 companies were at their second highest level in the last 20 years. Some observers see more than just cost-cutting going on. Indeed, one of the biggest question marks revolving around this whole margin story involves the Federal Reserve and its stimulus programs. What happens when the Fed reverses course, and starts draining liquidity from the market place? Even if it "tapers" bond purchases, even if it adopts a go-slow approach, interest costs are almost certainly going to rise, commodity costs and other general costs are almost certainly going to rise. It would be hard to imagine the economy not slowing down. Still, markets sometimes have a tendency to react first and analyze later.
Most of the good news came from the housing sector. Here are some key economy updates from last week.
· Initial claims for unemployment fell to a rate of 340,000 for the week ending May 18, down from 363,000 the prior week and lower than expected.
· Existing home sales rose in April to a seasonally adjusted rate of 4.97 million, up from 4.94 million in March.
· The FHFA housing price index for April rose 1.3 percent from March.
· The Japanese yen has fallen further and is now down 25 percent from last September.
· China's economy is showing signs of losing momentum in May. Economists now predict China's GDP to grow 7.7 percent this year and 7.5 percent in 2014. This is down from prior years.
The market is anxious about next month's Jobs Report but during this week's economic calendar, investors will watch out for GDP and Jobless Claims on Thursday. Meanwhile, enjoy the "cooler" summer days.
Information provided by NYCB Capital Markets