Monday Market Commentary: Will Influenza Influence Interest Rates?

by Alex Stenback on April 27, 2009

Last Week
Mortgage rates remain at historically low levels and saw very little change last week as markets failed to latch-on to some mildly positive (in a “not completely horrific and thus positive” sort of way) developments in the outlook for financial institutions.

If you are watching interest rates, the only guarantee is that they will head higher when the economy begins to recover, which is why I am watching for inflection points so closely.

Some recent developments – most notably improved earnings for some big name financials like Bank of America - have been cast as a glimmer of hope for economic recovery.  Before you buy headlong into the idea that the worst of the crisis is over and it is only a manner of time, spend a few minutes reading this excellent summary by Jeff Harding, vis a vis, economic “green shoots.”

This Week
The possibility of a serious influenza outbreak provides a morbid backdrop for global markets this week – depending on the severity and speed of any further spread, there will/may be flight to quality moves around the globe as investors position assets in safe havens to guard against the dysfunction and chaos that may grip markets should a serious flu epidemic or pandemic develop.

Against that setting, the economic calendar may take on secondary appeal, but there are a number of important reports whose influence will swiftly be brought to bear if the influenza’s impact turns out the be mild.

  • [Wednesday 8.30 AM ET] The first look at first quarter GDP is released.  It is expected that the economy contracted at a 4.5%-4.9% pace. Anything significantly worse than that may help rates move lower.
  • [Wednesday April 29, 2.15 PM ET] The Federal Reserve Open Market Committee wraps a two-day conclave on Wednesday with a policy statement and rate decision.  Fed-directed interest rates (Fed Funds, Discount Rate) will remain anchored at ultra-low levels – so I do not expect any surprises here.  The statement itself will give us the current state of and latest prognosis for our fragile economy. Hints of a second half  recovery may embolden market optimists.  This would push rates higher.
  • [Thursday, 8.20 AM ET]  Personal Consumption Expenditures Index gives us a read on income, spending, and inflation at the consumer level for March.  Any inflationary ticks here could pressure mortgage rates higher.

Update: There’s also eleventy billion metric trillions of Treasury debt issuance on the calendar this week.  That amount of new supply hitting the bond markets makes a move lower in interest rates awfully tough.

Anyway, add possible global influenza outbreak to the list of “things that may influence interest rates.”  Don’t think it can happen?  Here’s a great read that I plucked from my home bookshelf on Saturday.

· This Week’s Economic Calendar [Barron's]
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