The stock and bond markets showed extreme volatility in response to last Friday’s S&P downgrade on the US credit rating. But after things settled, there was some economic news that actually showed improvements in the economy that reduce the odds of a double-dip – Initial Jobless Claims finally broke through the key 400,000 level and Retail Sales figures for July showed the largest monthly jump in consumer spending since March. The ultimate stroke of irony occurred when interest rates finished the week 0.250% lower than it started following the downgrade, with the 15 Year Fixed mortgage rate falling to the lowest level on record.
This past week, the Dow did something it has never done before – in four straight trading sessions it registered swings of over 400 points. The 634-point decline on Monday was the worst point decline since December 1, 2008 and the sixth steepest ever. The consistent swings suggest an underlying uncertainty in the market, with fears about European debt, the instability of US finance, and a slowing economy taking center stage. With uncertainty and volatility taking hold, investors have continued to pour money into US government Treasury bills because there are few alternative safe-haven assets out there that can match the depth and liquidity of the Treasury market. The Federal Reserve Beige Book report also triggered knee-jerk reactions following their decision to leave short-term interest rates unchanged through mid-2013. It’s the first time the Fed has specified a date through which rates will remain “exceptionally low”. The committee also noted that the economy has grown “considerably slower” than expected and consumer spending “has flattened out”.
Currently, the 30 Year Fixed is 3.875% (4.018% APR) and the 15 Year Fixed is 3.250% (3.430% APR). The economic calendar this week includes Housing Starts and Building Permits, Industrial Production and Capacity Utilization, Jobless Claims, Existing Home Sales, Leading Economic Indicators and the monthly inflation reports.