Rates Went Up…What Happened?
It’s starting to feel a little more normal. Rates this week will tell you the economy is starting to open up.. and I’ll share why. But I have to start by highlighting the fun going on at the Downtown Aquarium this weekend.. it’s SLOTH Weekend.. and who doesn’t love a good sloth?
Yep, Sloths, miniFests, Colorado Garden and Home Show, the Petite Parade, and music at Number Thirty Eight and Larimer Lounge this weekend are bringing normal back. Now onto those pesky rates…
This week was a big one! Everyone was talking about how rates were going up. But I’m more interested in the why and when the uptick might end. Understanding the why not only helps us communicate the information proactively but starts to highlight the triggers of further deterioration or a reversal.
Here’s what happened and why rates couldn’t catch a break…
- UMBS 30 YR 2% Coupon had it’s largest drop of 50 bps on Tuesday on the heals of an incredibly strong Empire State Manufacturing Index. The 10 YR broke 1.30.. the highest since March 17th when rates were 3.65%. The Empire State Manufacturing Index is a monthly survey of manufacturers in NY state and rates the relative level of general business conditions. The headline number released before markets opened on Tuesday climbed nine points from 3.5 to 12.1, it’s highest level in several months and 2X the estimate. Prices rose 8 points to 23.4, the highest since May 2011.. showing strong inflation on goods.
- Tuesday night President Biden held his Town Hall. He was in his elements as Comforter in Chief. Besides the moments he took speaking right to a small child and talking about kids going back to school; he also promised 600 million doses by the end of July. With 328 million people living in America, that’s two doses for every American. Stocks continued their rally and bonds prices continued their decent on the hope of our country opening up this summer.
- Wednesday kicked off with the Producer Price Index coming out 3X higher than expectations. The Producer Price Index measures wholesale prices and doesn’t usually move markets, but then again, it doesn’t usually come out showing prices increased three times their expectations. The needle moved 1.3% verses the expected 0.4%.. so not a big number, but the size of the jump scared the market.
- Wednesday also brought us a disappointing 20 Year Bond Auction, after a lackluster 10 Year Bond Auction last week. The Fed is the largest buyer of mortgage backed securities and treasuries, but they also need other investors to come along side them. With the threat of inflation.. the arch enemy of rates, investors chose to put their money elsewhere.. like a raging stock market. The scarcity of buyers did what it was scared of most, dropping prices, which adversely raises yields (aka rates).
- To round out a market moving Wednesday, Retail Sales came out 5X higher than expected, increasing 5.3% in January way exceeding expectations of a 1.1% growth. Americans LOVE to spend and a pandemic is not going to stop them. They also are doing a great job saving as a report from Goldman Sachs showed that households have $1.5 Trillion in ‘excess’ savings, with expectations for it to rise to $2.4 Trillion by mid year. 40% of this excess savings is held by the top quintile of income earners. Yep.. the K shaped recession is a real thing. As America opens up, people are going to look for ways to spend and as that demand puts pressure on supply; inflation is expected to rise for both goods and services. However, as labor returns, supply side constraints are supposed to provide a little relief.. think of opening up the nozzle on the pressure cooker 😉
- Friday saw another 35 bps drop in the UMBS 30 YR 2% Coupon as Janet Yellen spoke with CNBC saying “Go Big”.. that this is not the time to cut corners, that we have to spend our way out of this recession. She also said that we are going to pay for this with higher taxes (fearful face emoji)