Financial markets - Monday, March 30, 2015

By Louis S. Barnes                                                   Monday, March 30, 2015      Financial markets are in a bit of spring break, common to the last week of every month while waiting for the often-explosive data released in the first days of each new month. Hence here both a review and a look forward -- first domestic, then overseas (never in modern US history have foreign matters been so important to US markets), then bring it together.      Mortgage rates have again bottomed in the same place, twice so far this year near 3.75%. I think we should take seriously the pattern. These bottoms have taken place despite generally soft US data which should have helped rates: orders for durable goods in February were especially poor, down .4% versus forecasts for a similar gain. Several analysts think inflation is showing signs of future increase, toward the Fed’s target, but modeling like that is terribly unreliable in today’s changed world.      Long-term rates also failed to fall during late-week air pockets in the stock market, something to do with overbought technology shares, the loopiest of all. This week’s reports of new “selfie-tools:” a powered selfie-stick (camera holder), and a toaster made in Vermont (buy USA!) which will scorch into bread the image of your favorite selfie. Jam on that. Thus we rely on technology as a key component of growth.      Other supports for bonds and lower rates faltered: the dollar stopped its relentless climb, which had attracted buyers for our securities, and oil stopped its drop, which had provided faith in low inflation ahead. Right there we move overseas.      Reviewing foreign conditions is a lot like each morning for us old folks, making exploratory function and pain checks before getting out of bed. Start with the Middle East: are new upsets pushing up oil prices? Probably not. The US is obviously disengaging, allowing ancient scores to be settled directly by the people who live there, a good thing. In the new battle of Tikrit American advisors are safely inside our wire. We apply limited air power to support our Iraqi Sunni tribal friends, joined by Iraqi Shia militia supported by Iranian forces, our friends and Iran’s together fighting ISIS Sunni bad guys just like the ones who Marines pushed out ten years ago. Yemen: we have pulled our special ops, and the Saudis and other Sunnis have intervened on their own to prop the Sunni Yemen government against Houthi Shias supported by Iran.      Got that? Clear? If locals-on-locals is a threat to financial markets, I don’t see it. Same for Ukraine: presumably Vladimir is readying new nibbles, but Europe won’t fight.             The ECB is proceeding with QE, but European rates are already so low (German 10s pay 0.19%) that the ECB is just buying cash with cash. Europe will begin to show better numbers, but based on currency devaluation -- zero-sum versus damage to the US and China. A Greek exit could happen at any time, and would help rates briefly, but would cause serious upset only if exit were contagious to the rest of Club Med, and it does not seem so. Not now, not yet. Japan is... Japan, implosion at a snail’s pace.      That whole overseas rundown is less scary than any time in a year or more, which is too bad because worry is most helpful to bonds and low mortgage rates.      With foreign help dwindling, stick with simplicity for the cause of bottoming rates: the Fed is coming. The bond market has done a splendid job maintaining denial, but cracks are showing in that resolve. For the Fed to delay liftoff, and to rise on low slope, it will need a steady feed of poor US data. Hence a very big deal immediately ahead.         The ISM survey will arrive Wednesday, and the all-important payroll and wage data on Friday, April 3. Which is also Good Friday and Passover -- markets staffed only by short-straw rookies, which will magnify the effect of any job/wage surprise. Beware long weekends: the worst of my mortgage-market life was Volcker’s Massacre over 1979 Columbus Day weekend. The second-worst: the Fed had just begun a tightening cycle in 1994 (from 3% to 6% in one year, gulp), and we got a positive job-market surprise on Good Friday-Passover. Mortgage rates rose a half-percent over the weekend. Not predicting, just sayin’.      For complete chaos, and canceling all rate worry above: a weak report on jobs.