Interest Rates Firm Upwards

Interest rates inched up a bit again this week.The following are excerpts from the newsletter on interest rates published by HSH Associates :

” There was precious little good economic news to be seen this week, but interest rates firmed anyway, as stock markets continue to find reasons to push higher.

As the economy oscillates, so go mortgage rates. A spate of poor economic news pushes them down; optimism about the economy lifts them again. The Fed even remotely considering expanding or extending QE3 presses them lower while remarks and expectations that the program will end sooner kicks them higher. Modest moves upward and downward happen with a regular frequency with little discernable direction or trend to be seen.

So round and round we go. All we know for sure is that we remain fairly distant from the Fed’s goals of 6.5% unemployment in a context of stable prices at or around the Fed’s goal of 2 percent inflation.

The headline CPI declined by 0.4% in April, a second consecutive month of falling prices, dragged down by another decline in energy costs. Core CPI, among the Fed’s preferred measurements of inflation, expanded by the barest amount of just 0.1%. With the two-month slippage, the headline CPI is now at an annual rate of just 1.1% (the lowest since 2010) with a core CPI of just 1.7 percent. Both measures had been running close to the Fed’s goals at times over the last six months of so, fostering some speculation that inflation might be becoming more of a concern and that QE programs would need to be dialed back more quickly. The reality of the situation is that with a Eurozone in recession and slow growth here, in China and elsewhere, inflation will continue having a hard time getting a toehold for some time yet.

Collectively, what do we have? Low and falling inflation. A soft and perhaps weakening manufacturing sector. A labor market which seems to be having as many setbacks as advances, and a housing market which is better than a few years ago but a long way still from full health. We have a Fed which is committed to keeping its foot on the throttle, at least for a while yet, and an economy which is grinding its way slowly forward. How equity markets can be so cheerful in such an environment is puzzling, but it is worth noting that the US is the best (perhaps only) investment game in town at the moment, as there are few places to put cash that will produce any kind of return.

As long as enthusiasm for stocks persists, we are likely to continue to see mortgage rates holding above record or even recent lows. However, until there are clear signs that the economy is accelerating, unemployment is steadily falling or prices are regularly rising there is little reason to expect that the Fed will change course anytime soon. Collectively, this should keep us tethered at very low levels even as we experience fits and starts of good and bad news driving rates up and down. We had a run up in mortgage rates in the mid and late winter and a mostly downward run since then. For the moment, we are headed back upward, but this upcycle may not even reach the 2013 highs of March.

That said, we do expect another 3-4 basis point rise in rates next week. “

The following are interest rate quotes from Al Hermann of American California Financial: