Market Update June 30, 2008
Risks favor: Carefully Floating , but watching resistance
Current Price of FNMA 6% Bond: $101.00, +9bp
Big news about Inflation in the Eurozone shows the rate surging to 4%. This year over year rate, reported for June, was the fastest in 16 years, and more than double the ECB’s target of between 1 and 2%. Let’s remember, and as we have discussed, our Fed has a dual mandate – keep inflation low and promote growth. But the European Central Bank or ECB has a single mandate – keep inflation between 1% and 2%.
This news has started talk that ECB President Jean-Claude Trichet will raise rates (Europe’s equivalent to our Fed Funds Rate) by .25% this coming Thursday, making Europe’s benchmark rate 4.25%. That’s far higher than the 2% rate here in the US. So investors seeking higher yields will likely buy even more Euro Dollars instead of US Dollars as they convert their investments. This will make the Euro even stronger against the Dollar. And once again, oil is based on Dollars for price, so weakness in the Dollar means oil prices have to move higher in order to compensate – almost like our bond yield and bond prices do. The ECB President is in quite a pickle. Inflation is running hot throughout Europe, but at the same time there are several European countries seeing very weak growth, including Ireland and Spain. A rate hike as early as this Thursday would apply even more pressure on economic growth throughout the region.
A hike in Europe Thursday may just wake the Fed up and push them to hike in August. That would be good for mortgage bonds.
On the news, Oil is popping over a $142 a barrel, as Traders handicap the Dollar / Euro relationship. The Chicago Purchasing Managers Index was reported at 49.6, which was better than expectations of 48.5.
Technically, Mortgage Bonds are now trading just above the 25-day Moving Average, but are facing another ceiling of resistance.