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Turner: Expect Low Short-term Rates; Volatility in Longer-term
Friday, August 2, 2013 5:55 AM

The Commerce Department reported that its first estimate of Q2 2013 GDP came in at +1.7 percent, down from the previous quarter’s +1.8 percent, which had been downwardly revised from its initial +2.5 percent estimate. Together with the statement from the FOMC, Catalyst Strategic Solutions’ Director and Chief Strategist Brian Turner says it can be easily determined that economic growth continues to be stagnant despite the trillions of dollars that the Federal Reserve has injected into the system.

“Private sector growth is not recovering very rapidly and the fact that overall growth cannot surpass +2.0 percent without government spending component represents just how weak the economy remains,” observes Turner.

Consumer demand remains weak, as spending behavior has not materially changed in the post-recession period.

“This weak demand stymies production, employment and expansion,” notes Turner.

The Fed has said that will not raise its overnight rate target until the unemployment rate falls below 6.5 percent. At the current pace of job creation, Turners suggests that there is no way that can happen until at least the first part of 2016 – more than three years from now.

Turner says we should continue to expect low short-term rates and volatility in longer-term.

“The recent rise in the longer-end of the treasury curve is more market driven than basic fundamentals,” he says. “Mortgage spreads are relatively unchanged and as a result, mortgages rates are between 65 to 75bps higher than earlier this year.”

“The refi-market is virtually tapped out and home purchases, albeit on an upward trend, is not sufficient to sustain. That should narrow spreads later this year,” Turner continues.