March 22nd, 2011 8:50 AM by Lehel S.
The rate markets opened weaker today following selling yesterday. At 9:00 mortgage prices off 7/32 (.22 bp) frm the close yesterday, the 10 yr note -8/32 at 3.35% +2 bp. Not much new in the news from Libya and Japan; the coalition forces have bombed and missiled key cities in Libya trying to weaken Qaddafi forces (or is it Gadhafi, Gaddafi, Kaddafi, or Kaddafy). One US F 15 went down but not by fire, both pilots are safe. Aerial strikes enabled rebel forces to push out from their eastern stronghold of Benghazi. The countries involved in the attacks, Britain, France and the US are now debating who should lead the remainder of the intervention.
In Japan the reactors are still a problem but haven't worsened. The debate in markets has now shifted to how Japan will recover; there is an increasing but fragile view growing in markets that Japan is a buy in terms of equities. Japan will rebuild and recover according to huge investor Warren Buffett. Analysts from The Street are falling in line that the global economic impact won't be as serious as was thought at the onset of the earthquakes and tsunami. It isn't a slam dunk but with Buffett saying he is investing in the country the rest of the lemmings may fall in line and march to the same tune. Still very much a moving target however. The biggest hurdle we can see is electric power, Japan has lost a huge amount of power supply that won't be replaced quickly. Prime Minister Naoto Kan yesterday said there’s “light at the end of the tunnel” in the nation’s battle to avert a nuclear meltdown at a crippled power plant, which threatened a deeper shock to the nation’s consumers.
European Central Bank officials indicated the economic uncertainty caused by Japan’searthquake may not deter them from raising interest rates next month. ECB President Jean-Claude Trichet told the European Parliament he has “nothing to add” to his March 3 remarks, when he said policy makers may raise the benchmark rate from a record low of 1.0% at their next meeting in April.
The stock market opened relatively unchanged ahead of 10:00 data on housing prices and regional manufacturing from the Richmond Fed.
At 10:00 FHFA reported Jan housing prices fell 0.3% frm Dec; Dec was revised from -0.3% to -1.0%. Yr/yr housing prices declined 3.9%.
Also at 10:00 the Richmond Fed manufacturing index; the index fell to 20 frm 25, the reaction cut the losses in treasuries in half and pushed stock indexes down.
Although so far today market volatility is subdued or a change, market volatility will continue to remain high. Not the kind of market environment that is conducive to taking risks unless one has a huge deep pocket. Sentiment changes rapidly on any news headline. We are most outwardly concerned about Japan and Libya but there is a lot to be concerned with especially in the overall Mideast region. Protests are increasing in many of the countries in the area; Syria, Yemen, Bahrain, Egypt, Tunisia, Turkey, and the list is growing. So far nothing serious is building but it is being closely monitored.
The outlook for US interest rates has not changed with Japan and Libya in the picture; interest rates in the US are going to head higher. Rates in China increasing, in India increasing, in Europe increasing; the Fed is close to being done with QE 2 buying $600B of treasuries, inflation fears are on the rise in most of the world while here it hasn't yet spread out of food and energy components it is only a matter of time before all prices begin to edge up. Not much inflation but with the 10 yr note at 3.35% and historically low there will be no hesitancy by investors dumping long term fixed income investments. It may be next month or six months but rates will increase.