Sep 142016
 

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By G. Steven Bray

It seems market sentiment has changed, which could be bad news for interest rates in the near term.

The quick jump in interest rates over the past few days was in reaction to investors’ fears that Central Bank printing presses might shut down. The trouble started last Thurs after the European Central Bank meeting. At a press conference, its president suggested through omission the Bank might stop inflating its balance sheet next year. Alarm bells sounded. No more money raining down from heaven. And the selling began.

Stocks and bonds have been selling off ever since as markets adjust to the idea that easy money might not be a permanent condition. Of course, markets are ignoring that the Fed continues to reinvest billions of dollars into Treasury and mortgage bonds, that Europe and Japan have official negative interest rate policies, and on and on.

So, rates are up a little. They still haven’t broken out of the range they’ve occupied all year. In fact, we’re in the middle of it. To break the range, I suspect we have to see stronger US economic performance. To that end, we have two significant data points this week: retail sales and inflation. Of the two, I think inflation could have the larger impact if the report shows a sizable increase. One reason the Fed has been reluctant to raise short term rates is the near absence of generalized inflation. If inflation should start to bubble, look for the Fed to try to get in front of it with a series of rate hikes. While Fed rates don’t directly affect mortgage rates, its change in policy stance will reinforce the market’s change in sentiment.

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