Europe is again creating a drag on the world’s economy, which is sparking concerns of worldwide deflation once again. Two of the greatest risks to an economy are inflation and deflation. When prices move up to quickly, it absorbs more of a consumer’s income to live and creates a drag on the economy. However, when prices are in a state of deflation, consumers put off making purchases in hopes of achieving a lower price at some point in the future. The market is becoming convinced that despite the trillions of dollars the Fed has spent to boost inflation, they will be unable to achieve their 2% objective before the end of the decade. Considering how long of a timeframe that is, and how long rates have remained low, it is hard to believe. Another good side to these thoughts is that a continued increase in strength in the dollar and deflation in Europe makes it a wonderful time for those who have been wanting to travel to Europe. Just a thought….
Oil is again heading lower, with prices not at $85 per barrel. This is welcomed news at the gas pumps, where we are now seeing more reasonable prices to fill up our cars. This is further weakening the possibility of inflation, as higher gas prices impact the cost of transportation, which is typically passed on the end consumer. As the dollar strengthens, this trend will likely continue, further lowering the cost of gas at the pumps.
The S&P 500 fell below its 200 day moving average yesterday, and is now fighting its way back to try to challenge what is now overhead resistance. Stocks have now been decisively below the 100 DMA for the first time in well over two years, and until now have not even came close to falling beneath the 200 DMA in years. This is a very negative indication for the stock market, and shows that the end of QE3 may be more damaging to the markets than originally expected. It is interesting to note that many of the economists who were projecting a continued climb higher in the stock market as well as with interest rates now seem to be less present in the media. It is clear now that many were wrong in their projections of the market. However, it is often just a guess and in reality, there is often motive for saying things to help influence the direction of the market.
Mortgage rates are again down at 16 month lows. Once more, the direction of the stock market will likely dictate where interest rates move from here. If stocks are able to climb higher, this will add upward pressure to interest rates. As we wait to see what happens, for the moment we see no need to rush to lock. However, if the bond market loses steam, we will switch to a locking bias.