The Shirmeyer Report's blog

The past two sessions have been confusing technically; rarely do we see the 10 yr note move 17 basis points up in one session as it did last Friday, then the following day rally back to erase almost all the rate increase. The selling on Friday did serious damage to the note but with no follow-though yesterday and a firm opening this morning taking the 10 yr back to its low yield at 2.48%, we are somewhat at a loss to explain what happened Friday and yesterday. Fundamentally, the equity markets were very weak yesterday sending buying back into safety at the long end; Friday the DJIA gained 165, yesterday -141. Bernanke's speech on Friday, saying he is ready to execute more quantative easing if necessary, that the economy is growing slowly, really sent mixed signals. It is tiring to continue to hear Bernanke with his upbeat talk about the recovery when he fully knows that isn't the case.

Treasuries and mortgages rallied hard today, getting back almost all the price declines last Friday. It leaves us with the question, was Friday just a freak one and off day, or was it a warning that interest rates are running out of steam? Last Friday afternoon we were thinking the end of the rally for a while, but after no follow-through selling today and good buying, the answer is, we will wait to see over the next couple of days. The 10 yr note increased 17 basis points in yield on Friday, today the rate dropped 12 basis points. Mortgage prices fell 18/32 (.56 bp) Friday, up 15/32 (.47 bp) today. The 10 yr has faltered at the 2.50% area recently, until the market can achieve a clean break into new low yields caution is the strategy at the moment. 

Bonds and mortgages got spanked hard last Friday, rocked around all week...again with the market given back all the week's gains and then some on the shorter dated stuff. The data, the Bernanke, the technical, all played into the beat down and got some added help as markets in general decided to put risk back into play, consequences be darned. The 10-yr was able to take out a batch of key levels fairly easily with thinned Fri in Aug volume not helping any while traders reported mortgage players were not in as a presence.

Treasuries and mortgages are under pressure this morning with the revision of Q2 GDP, expected to have declined from +2.4% in the advance data last month to +1.4%, as released GDP was reported at +1.6%. The equity market rallied on the better than expected growth and sent the interest rate prices down. 1.6% is nothing to shout about but with most big investors still sitting out traders have a field day moving prices around with little overall changes when seen from a wider perspective. Wages and salaries increased by a revised $6.5B in the first three months of 2010 from the fourth quarter, compared with $18.8B initially reported. The figures incorporate new, more comprehensive data from the Labor Department and show why consumer spending will be hard-pressed to accelerate in coming months.

In this confusing economic world, the most unsettled time since the Depression, what we need is more clarity, more clarity from the Federal Reserve as to what it believes on the subjects of deflation, monetary policy and the economic outlook. So far the Fed seems to be a divided group with FOMC members and Fed governors offering up differing views on the subjects. KC's Hoenig wants the Fed to begin thinking seriously about tightening rates while most data on the economy is getting worse, others fear deflation and still more think we are headed for a Japanese deflation that may last decades (Japan is now 20 years into deflation). Hoenig is still tilting at the wrong windmill; higher rates now or in the next year would crush the remaining life out of the economy, he has to know that, so what is his agenda?