Weekly Information 7/23

One line in Perfesser Bernanke’s testimony dominated the week, but in an odd way: it was an anti-forecast. “Uncertainty about the outlook for growth and unemployment is greater than normal....” The stock market took it as good news (in that NeverNever Land, the only uncertainty is how high it will go), but bond market people took it the other way, the 10-year T-note briefly 2.88%, a fifteen-month low. That mid-week low has reversed, mortgage rates ending the week slightly higher. Nothing in a thin week for economic data caused the reversal: housing stats were about as shaky as expected, June existing-home sales off 5%; and new claims for unemployment insurance jumped back up to 264,000 last week, the 2010 trend. Rates are wandering up because of a news vacuum: investors will not continue to bid rates down without confirmation that the post-May slowdown is still headed downhill, and the next meaningful reports are almost two weeks away. Our rates have been helped since spring by fears in and about Europe, and that benefit is on hold also. In the short run, the steep devaluation of the euro is a huge help to the exports of North Europe and those economies. Also, the European Central bank has temporarily stopped a run from Club Med bonds, and a parallel bank-on-bank run. Nobody in the bond market takes seriously the European bank stress tests, but the foregone conclusion, "All okay in here!", makes it impossible to read future ECB policy and masks true instability. The marker: if the 10-year T-note blows above 3.00% to 3.10% or higher, the bond market is buying recovery, or at least has lost fear of double-dip. Today's 2.95% says this is just a pause before more slowdown data can take us lower.