This Week: its back to work with a full compliment of investors and traders after two weeks of very low trading volume. The year ended on Friday with an unexpected strong rally in the bond and mortgage markets, the 10 yr note yield fell 9 basis points and mortgage prices increased by .69 basis points; we believe it more short-covering than anything substantial, but we will take every improvement the market provides.
This week there is no Treasury borrowing, there is data everyday ending with the Dec employment report on Friday. The FOMC will release the minutes from the Dec 15th FOMC meeting on Tuesday, should get a lot of attention as always. 2010 ended with the increasingly strong belief that 2011 economic growth will increase, sending the equity market to one of the best years in many years. The situation in Washington will change dramatically with Republicans now in control of the House and more strength in the Senate. One of the first things Republicans want to do is work on Obamacare, making what most believe are necessary changes, the issue is what changes will everyone agree are the right ones.
January and February markets will continue to wrestle over the outlook for the economy; it will likely take into Feb to get a handle on consumer spending. Wall Street for the most part is expecting consumers to increase spending, we don't believe that will be the case however. Consumers will more likely save than spend, the demographic changes with 10K baby boomers a day turning 65, a trend that will continue for the next 10+ years and spending by the huge population of boomers won't meet the expectations currently out there. We believe 2011 will disappoint, consumers are more savvy than all those that work east of the Hudson River. Housing is still in dire shape and will continue all through 2011. Inflation fears are probably overdone but still will weigh on the bond and mortgage markets. Monday the 10 yr note yield opens at crucial technical levels, more improvement will change the near term outlook from bearish on rates to one of neutrality. We suggest potential home buyers take advantage of the opportunity if rates improve early this year; it is very unlikely longer term rates will decline much and more likely to increase as the year progresses.
