August 3rd, 2010 11:57 AM by Nick Rapplean
It was a week to turn many of the things you may have learned in Econ 101 upside down. In Tuesday’s Treasury auction, the 2-year T-note was bid to the lowest yield in its history; Wednesday, same result for the 5-year T-note. Thursday, no doubt expecting another record low yield, a lot of bidders just stayed home, resulting in a somewhat soft auction. But the yield for the 7-year was still attractive.
At the same time, the average 30-year Freddie Mac mortgage rate shed yet another two basis points, taking it to an all-time record low of 4.54%. Now, that’s a mortgage interest rate that should make you stand up and pay attention, yes? Yes—but the garden variety borrower isn’t acting on it.
Hmmm. Well, Basic Economics tell us that, if interest rates are scraping the cellar floor, then the stock indices must be falling as well. But no. In July, the Dow enjoyed a 7.1% advance.
As David Byrne titled the Talking Heads movie, “Stop Making Sense.”
Recent trends would suggest that if interest rates are racing their way south, there must be fearful news out there—an exploding European bank, at the least. Again, no. The pressure seems to be off for the moment in Europe…though the national economy did deliver plenty of unpleasant news—culminating in a GDP report with very little to recommend it. Indeed, not only did the economy slow from the prior quarter’s 3.7% rate of growth to 2.4%, we also saw downward revisions of economic growth for the past three years.
Amazingly, though, the stock markets waded through news like this without losing their footing. The Dow ended the week a bit higher than where it began.
It may pass quickly, but a question seems to assert itself with shrill inevitability: Why are corporate earnings looking so good if the GDP is flagging? Further, and more specifically, corporate profits were up 21% in the second quarter—so why was consumer confidence down to its lowest level in nearly a year?