January starts with added pressure for rates to move higher
January 1, 2010 by admin
The New Year starts with speculation that interest rates will continue moving up in January as the market continues to gain momentum. Late last week, Freddie Mac reported that interest rates have reached their highest levels in the past sixty days as long term mortgage rates continue to climb up. The threat of inflation entering into the market is now a possibility for the first time in the last 12 months as the probability of GDP growth will continue and a strong possibility of a turn around in the labor markets is present. The first week of the new year will be critical for setting the tone for the month of January for the market, the ADP payroll report and governments non farm payroll report will both be released next week and will certainly play a large role in determining what direction the stock/bond market heads.
Yields on the ten year treasury bond rose over fifty basis points in the month of December, the largest increase in the bond market over a thirty day period since June and pushing yields on the closely followed ten year bond closer to 4%. The market is closely following the increase in the spread between long term and short term rates. The FOMC is certainly going to begin increasing the rate on the Fed Funds rate in 2010, but until this actually begins to happen, the yield curve will feature a large spread between long and short term interest rates, similar to the market in 2004 and early 2005, which was the height of refinancing into variable rate mortgage loans for the housing market. Yields on long term rates have been under pressure as investors are gaining confidence that the economy will fully recover over the next 12-24 months, and with the improvement inflation will again be an area of concern. The dramatic decline in the economy over the last year has almost created a deflationary marketplace. Energy remains one of the only areas of the economy that has seen a steady price increase in 2009, but remains well below levels of 2008 for oil.
Consumers and confidence will be the topic of the year. Improvements in the labor market will help boost spending and production, but there is certainly going to be a more cautious outlook with consumer spending in the future. The elimination of easy credit financing will play a lingering role in the recovery of the economy. Government financial subsidies will also begin to wind down in 2010, but the possibility of a national health care overhaul remains a wildcard in the market and could change health care and insurance for good. The month of January will be a good test to see if the recovery will be sustainable and could test the DOW and Ten Year Treasury twelve month moving averages.