Last Week in Review: The Fed met and a “Gross” Domestic Product was reported.
Forecast for the Week: A busy week is ahead, with important news on inflation, manufacturing, and the job market.
View: Ever wondered what the world was really like when you were born? There’s a fun way to find out.
Last Week in Review
If at first you don’t succeed, try, try again. Last week, that popular idiom could have applied to the Gross Domestic Product (GDP) Report. Read on to learn why…and how all the week’s news impacted Bonds and home loan rates.
The Advanced GDP reading – or first of three readings – for the 4th Quarter of 2011 came in at 2.8%, a bit below expectations of 3.2%. This number will be revised two more times, but if the final GDP remains at 2.8%…then the overall GDP for 2011 would be a scanty 1.57%. That is certainly a “Gross” Domestic Product, when you consider that the government has underwritten more than half of that economic growth with the Payroll Tax benefit.
Also in the news last week, the Fed’s Policy Statement after its regularly scheduled Federal Open Market Committee meeting was pretty much the same story as recent Statements, including stable long-term inflation expectations, a tepid economic recovery, and fragile job market. But there was one big exception to their norm. The Policy Statement said there will be “exceptionally low levels for the Federal Funds Rate at least through late 2014.” This is a huge change from the previous statements of “low rates until mid-2013.”
On the surface, extending the zero interest policy until 2015 tells us the Fed thinks the economy will just be slogging along, and accommodative monetary policy will be required to keep the economy growing at least at a modest pace. One could argue that recent economic data is better of late and that all this loose monetary policy is unnecessary. But the Fed has spoken, and as the old adage goes: “Don’t fight the Fed.”
In news out of Europe, yields in European Bonds have come down…and by quite a bit. This sparked some optimism that Europe’s Long-term Refinance Operation (LTRO) has helped alleviate some pressure in the peripheral countries in the Eurozone, like Spain and Italy. So what’s the takeaway? In honor of the upcoming Super Bowl, here’s a football analogy: think of the LTRO as a super punt or “kick of the can” down the road. Europe needs to play a serious offensive line by creating a tighter fiscal union, implementing austerity measures, and developing growth strategies to help pay down the enormous debt.
Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result.
As you can see in the chart below, Bonds and home loan rates remain near their historic bests. I’ll be watching closely to see which way they move next.
The bottom line is that Bonds and home loan rates remain at historic best levels, which means now is still a great time to purchase or refinance a home. Let me know if I can answer any questions at all for you or your clients.