Monday I called for higher rates and was correct early but wrong later in the day. Yesterday, I called for rates to remain close to unchanged expecting a similar trading pattern in mortgage-backed securities from the day before, and I was right. Today, I throw caution to the wind and forecast that rates will indeed rise and hold the higher levels through the entire day after coordinated action by global central banks will inject significant liquidity into the system and strong economic data in the US is reported.
Central banks in Europe, North America and Asia have agreed to inject significant liquidity into the world economy beginning next Monday through the establishment of temporary currency swap-lines. This is very good news as it eliminates the immediate potential of major European bank failures. It also highlights just how precarious the situation in Europe has gotten.
What has happened is that European banks are holding huge quantities of debt from Greece, Italy, Portugal and Spain that has lost significant value as these nations’ solvency has come into question. This has caused them to have to hold on their assets, reducing the money available in these markets from lending activity. Also, banks from outside the European market have been reluctant to lend to the banks in Europe creating a major issue for the European banks to fund their daily activities.
In the US today the ADP Employment Change report showed a surge in hiring. The result was significantly above expectations as 206,000 new jobs were reported despite an estimate of 125,000 new jobs. Also encouraging was a positive productivity report, though it was below expectations. Perhaps most important however was a strong Chicago Purchasing Managers Index which indicated much higher manufacturing activity than expected in this manufacturing-heavy region of the country.
The risks for the balance of the week definitely favor higher current mortgage rates rather than lower. However, with many more issues to address in Europe I do not expect rates to move significantly. Now remains an excellent time to refinance an existing mortgage or to obtain a new mortgage for a home purchase.
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