"SLOW AND STEADY?"

Last week, the economy appeared to be slowing. But despite the negative economic news, Bonds and home loan rates held steady and were unable to improve further. 
 
Let's look at what happened and what it means...
Housing Starts and Building Permits, which are leading indicators of the new home construction market, both came in below expectations that were already low. If you consider the significant amount of foreclosures and inventory overhang weighing on the market, it is no surprise to see a weak indicator on new home construction. 

Broadly speaking, foreclosures and short sales are expected to continue weighing on new home construction for the next couple of quarters... but as we all know, real estate is very local - so your particular market may be quicker or slower to improve.

Manufacturing reports were also disappointing last week. For example, Industrial Production, Capacity Utilization, and the Philadelphia Fed Manufacturing Index all came in below expectations - which helped Bonds last week.
So why didn't Bonds and home loan rates improve?

The recent rally in Bonds and home loan rates was partly sparked on the notion that US economic growth will slow - which the economic reports last week seemed to indicate. And when you also factor that the only two ways the government can lower the budget deficit is either by cutting spending or raising taxes - or some mix of both - the austerity measures could indeed slow the economy.

Normally, such soft economic data would help Bonds and home loan rates. But last week, Bonds had trouble making gains because - despite the negative economic headlines - some of the reports included data that was unfriendly to Bonds. 

Here's an example...
Last week, the Empire State Manufacturing Index was reported a lot weaker than expected. But, when you look beyond the headline number, you see that the "Prices Paid" component of that report - which measures wholesale inflation - showed the highest rate of inflation in three years... and the second highest reading ever! Remember, inflation is the archenemy of Bonds and home loan rates.

Additionally, the employment index of the Empire State Index was positive, which suggests hiring. And, in a separate report released last week, the Labor Department's Initial Jobless Claims number also showed the lowest level of unemployment claims in a month. Not only was that a good number from the standpoint of beating expectations, but it also indicated that April's surge in unemployment claims was more likely due to temporary factors rather than a worsening labor market. 

In the end, the positive employment news combined with the concerns over inflation offset some of the negative economic news last week and held Bonds and home loan rates in check. Both Mortgage Backed Securities and Treasuries traded dead on a ceiling of resistance last week. And unless Bonds can break above this ceiling, prices can't improve further. I'll be watching the markets closely this week to see if Bonds break above that ceiling this week.