rates to increase

As predicted, rates were extremely volatile last week and when the dust settled rates edged up about .375% by week's end. While inflation and the GFE's troubles (Fannie and Freddie) were the big newsmakers last week, the week ahead will be focused on the housing market. But the big question is - Will rates stabilize or are we in for more volatility?

So what caused the volatility last week? Rates initially benefited from the news that the Fed authorized Fannie Mae and Freddie Mac to borrow directly from the Central Bank if they needed additional capital. However, on Tuesday the Producer Price Index (PPI) report revealed that year over year inflation soared in June, marking the highest posting since 1981. Add to that the Retail Sales report also released on Tuesday, showed retail sales increased much less than expected. The Retail Sales report seemed to indicate that consumers were holding back spending and diverting their money to pay for essentials. This belief seemed to have been confirmed on Wednesday, when the Consumer Price Index (CPI), which measures the prices that consumers pay for consumables, jumped 5%, the biggest jump since 1991.

Although the week ahead offers little economic news to curb inflation fears, bonds may actually benefit from a weak stock market. If the stock market tanks, it is possible that stock investors may seek the shelter of bonds, which may level or even push rates lower.

The bottom line: Expect the market to continue its volatility and rates to increase unless the stock market suffers from the bad economic news.