Friday, April 25, 2008

Mortgage Rates will Rise if the Fed Holds

Happy Friday to everyone. Its amazing how the surge in oil and food prices can affect the Fed ability to cut rates. From Bloomberg:

"Futures contracts on the Chicago Board of Trade show there's a 32 percent chance the Fed will keep its target rate for overnight lending between banks at 2.25 percent on April 30, up from 2 percent odds a week ago. The balance of the bets is for a quarter-percentage point reduction."

So what has this done to Treasuries in the bond market? Same article:

"April 25 (Bloomberg) -- Treasuries fell, with two-year notes headed for the biggest two-week decline since November 2001, as traders increased bets the Federal Reserve will stop cutting interest rates at its policy meeting next week.

The two-year Treasury note yield rose 5 basis points, or 0.05 percentage point, to 2.45 percent as of 8:38 a.m. in New York.

Ten-year yields rose 3 basis points to 3.86 percent, climbing for a fifth week."

My Take:

Many mortgages are done based off the 10 year rate and its up for the fifth consecutive week. This will not be good for mortgage rates. Interest rate increases will not be good for stocks because it will put more pressure on the banks and kill lending. This will be another blow for the housing market.

There may be a short term disconnect between the market and housing. Stocks seem to want to push higher now that the financial world did not come to an end due to the Bear Stearns blowup. I expect this rally to be on its final legs simply because there is no catalyst to take stocks higher long term. This is a relief rally and nothing more as we head into a recession.

Recession anyone?

Merill Lynch's famed US economist David Rosenberg came out with a research report yesterday(same article)

"`Too Early'
The U.S. economy will shrink 2.3 percent in the second quarter, which means investors should stick with bonds, David Rosenberg, Merrill Lynch's North American economist in New York, wrote in a research report yesterday. It's ``still too early to move away from bonds and toward stocks,'' the report said."

Bottom Line:

Well I think David's comments says it all. A 2.3% drop tells you we are in recession. Anyone buying into this rally is going to get burnt. One of the best is telling you its too early to jump into stocks.

Stocks don't generally rise for good until you are about half way through a recession. Right now the end of this recession is nowhere in sight.

The bulls will try to spin the possible end of the Fed rate cutting as a positive because it will strengthen the dollar. The reality is its going to raise rates which will put more pressure on housing due to higher costs of borrowing.

The fact that the Fed is tapping on the brakes is going to hurt and have negative repercussions. Like Mr. Rosenberg said "its still too early".


Minton Mckarkquey said...

Well, Google just trashed by comment, but I agree. My major argument was about the market not noticing if the Fed does *not* cut... if I can find my post in a cache somewhere, I'll repost!

Minton Mckarkquey said...

Ok, so Google trashing may be good to help me be more succinct. My other point was (relating to one of your earlier posts and the general theme):

1. MSFT is in the crap today.
2. It never really moves much.
3. The YHOO deal is everything and YHOO are too stubborn-minded to make it work, leading to either:
(a) a Pyhrric victory for them;
(b) everyone leaves and $40bn gets wasted, since the investment is in the people.

Wow, I should be this brief more often!

Jeffrey said...

Hi Minton

Been a busy day and just got a chance to jump on. Interesting about your comment. Nothing changed on my side.

I think the merger might go through between those two. The PC business is dying and Yahoo and Microsoft need each other. I bet they agree to a deal at some point.

Microsoft is playing hardball and saw right through Yahoo raise in guidance.

Microsoft saw right through that move.

Amazing that the financials went up today. Party on right until we hit the iceburg.

The "buy the bottom trade" in financials play has about run its course. Its a pure momentum trade based on no fundamentals.

Its funny watching JP Morgan upgrade a company like Fannie Mae when defaults are through the roof. The yield curve doesn't mean squat when people aren't paying their mortgages.