Mortgage Rate Update, June 6, 2011

The first morning the markets are open after the granddaddy of all economic reports was released has arrived and analysts and traders appear uncertain about what to do.  The Non-Farm payroll Report on Friday fell in line with other measures of the US economy and indicated a quickly slowing growth posture.  Will the slowdown and the impending end of quantitative easing (QE) by the US Federal Reserve at the end of the month spell doom?

Mortgage Rate Trend Direction:     Up
Economic Reports/Rate Impact:    No economic reports released today
Key News:                                           Calls for QE3, Greece Austerity Protests

Summary
We have transitioned from a period where we wondered whether the US economy was slowing to one in which we wonder whether the US government can continue to stimulate the economy or will be forced to end the stimulus it has been providing for several years.  Based on early trading in the bond and mortgage-backed securities markets this morning the expectation is that stimulus is coming to an end.  Mortgage rates are headed up this morning despite fresh concerns over the debt crisis in Greece and its potential spillover in Europe.

Impact of economic reports
No fresh data to consider this morning will focus analysts and traders on last week’s Non-Farm Payroll Report and the end of QE2 on June 30th.  Typically when the economy begins to slow as it is now, the Federal Reserve would take steps (rate cuts, QE, etc) to provide stimulus.  Yet in this case the slowdown has occurred while rates are effectively at 0% and QE is still underway.  

Impact of international or political events
Over the weekend there were protests in Greece about the proposed new budget cuts the Greek government was planning in order to meet conditions imposed by European Union officials for the extension of an additional $12B in loans needed to stave of default.  What happens if Greece decides not to follow through with the budget cuts?  Will the EU make the loans anyway?  Might the consequences of not providing the loans be worse than providing them despite the Greek’s inability to balance their books?  

It appears that the crisis in Europe will be a huge issue for the economy over the summer.  Generally, with risks higher for investors elsewhere it would cause an increased demand for US debt and MBS—which would be good for mortgage rates.

New calls are being heard for a new round of stimulus or quantitative easing.  As a new round would be the third such effort it is known as QE3.  Most analysts don’t see the political will in the US to support a full blown new quantitative easing program in which the Federal Reserve purchases US Treasury Bonds.  Consequently, most observers expect what is being called QE2.5 or QE Lite.  In such an effort the Federal Reserve would simply use the proceeds of its maturing bond investments to purchase new bonds.  This might not be stimulative, but it may be supportive of the economy, keeping the economy from recession.