The economic data was thin this week with the only data points being released Wednesday. We received the December industrial production numbers were UP 0.9% in one month that’s a lot. Capacity Utilization was up to 79.9% from 77.1 % which was also a huge jump. Not good for interest rates.
The threat of the government going past their budget deadline was looming today and when there is uncertainty domestically, our bond market suffers. Last time there was a “fiscal cliff”, the bond agencies were threatening to lower the US’s bond ratings. So the bond market priced that in today. What is surprising to me is that rates haven’t gone up more since the stock market rallies and especially the one since the new tax plan.
Usually when stocks are doing well (and boy have they in the last 12 months) bonds do not do well (sleepy money) causing interest rates to go up. We have only seen a slight increase, but why?
The outlook for rates in my opinion is not good, because like a ball being held under water as soon as the pressure is off it will bounce up and high. The pressure and bounce are due to the fact that interest rates are being held artificially low. Just how long can the Fed hold rates down especially as inflation kicks in (see my economic report above)?
Inflation can be caused by too many dollars flowing, by trade imbalances, etc. so it’s a wait and see time, but it seems early signs of inflation are there. Uncertainty is there. Last week there were rumours that China would stop buying US debt which also would be a problem (turns out it was just a rumour but it did rock the market temporarily).
So to all my clients today I said lock in – don’t gamble.
Because of the strong economic data and the Federal budget crisis, rates were up .25% in most loan programs this week. Don’t hesitate, lock in!