Aug 222017

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By G. Steven Bray

Mortgage rates remain in a very narrow range near the lows for the year. Part of the reason for that is the usual summer doldrums. Another reason is the mixed messages coming from politics and economic reports.

On the political front, the Trump agenda, the prospects for which caused the Trump Bump after the election, has yet to gain much traction in Washington. Congress returns from its summer recess soon to face an enormous plate of unfinished business. With Congressional Republicans bickering with other Republicans, the White House dissing Congress, and Democrats just saying no to everything, concern about a government shutdown has legs. I don’t think the market is really trading this yet, but I suspect it’s an anchor that will keep rates from rising much in the near term.

On the economic front, most recent reports show continued, stable growth. However, inflation, which is one of the Fed’s mandates, has fallen by about a third this year. The Fed’s target is 2%, and we’re well below that level now. While low inflation seems like positive, the risk is that inflation turns negative. Japan is the poster child for how deflation can sap a country’s economy.

The one potential market mover this week is the Fed’s annual Jackson Hole symposium. In the past, the event has provided some surprises when Fed governors were more candid with their thoughts about monetary policy. However, the Fed’s current plan seems pretty set: start reducing the balance sheet in Sep and one more rate hike in Dec – maybe. The European Central Bank head also will attend this year, but it was reported that he won’t answer any questions about the ECB’s future actions.

So, absent a truly unexpected headline, the market may just stay asleep. We have two weeks until Congress returns from recess.

Aug 092017

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By G. Steven Bray

Last week’s stronger than expected jobs report had a minimal effect on interest rates, leaving them smack-dab in the middle of their recent range. Markets still are waiting for something to motivate them.

The most important motivator these days seems to be inflation data, and we have a couple measures reported this week. The one that probably will garner the most interest is the consumer price index, or CPI, this Fri. While this isn’t the Fed’s favored inflation measure, it has street cred and is widely watched by market participants.

If markets anticipate another weak inflation report, we could see rates lead off slightly lower on Thurs. However, if the report on Fri shows an uptick in inflation, rates could rise very quickly. Given that I think you could lose a lot more ground with a strong report than you could gain with a weak report, the risks of floating probably outweigh the gains.

The other motivator we’ve discussed is political uncertainty, and it’s certainly not going away. It acts as a background anchor on rates, but that could change as we get closer to Sep. Already, we’re seeing dramatic media headlines about the dangers of the fiscal cliff and a government shutdown. The drama only will increase, which means the effect on interest rates could increase, especially if Congress doesn’t start making progress when it returns from recess.

Aug 022017

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By G. Steven Bray

Bond markets seem to be stuck in the summer doldrums. Either that, or everyone is on vacation. Rates really haven’t moved much in the last couple weeks, and there doesn’t seem to be a lot to accelerate movement in the offing.

This is a jobs report week, and that usually would have markets on edge. However, job growth has been pretty steady all year. Markets will probably shrug at another solid report, and other economic indicators aren’t suggesting a weak report.

The one economic indicator that does seem to have the markets’ attention is inflation. That makes the wage growth component of the jobs report worth noting. However, the Fed’s favored measure of inflation, the PCE index, matched last month’s figure of 1.5%, still well below the Fed’s target of 2%. That suggests wage growth won’t likely be the surprise that makes rates move.

Congress is heading for vacation soon, and that will remove that source of inspiration until Labor Day. I suppose it’s still possible, but I think highly unlikely, that Congress will accomplish something meaningful in the next month. If anything, I think it’s more likely the lack of action will help keep a lid on rates as markets grow increasingly nervous about all that awaits Congress in Sep.

On the horizon, we have the Federal Reserve meeting in Sep at which the Fed is expected to put in place its balance sheet reduction plan. As we’ve noted before, this is a source of negative inspiration for rates, and it could magnify the effect of any headlines that pressure rates upwards. I don’t think floating is unreasonable at this point, but pick a bail out point if rates start to climb.

Drifting rates staying at summertime lows

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Jul 242017

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By G. Steven Bray

We were watching the European Central Bank last week to boost the momentum of our current rally, and its message, while somewhat muddled, was just soft enough to give rates a friendly nudge. That left rates at the lows for the month and looking for a new source of inspiration.

This is a Fed week, meaning the Federal Reserve meets to discuss monetary policy, and that normally could be the inspiration. However, this meeting has no post-meeting press conference, and the consensus is the Fed doesn’t make big policy changes at such meetings.

So, markets are left to drift with the tides. Because of low summertime market volumes, rates are more susceptible to choppiness around political headlines, economic data, and position squaring by investors. We discussed the first, political headlines, last week. Resurrection of the health care bill could be a negative for rates. A Russian bombshell could be a positive. For economic data, we have the Durable Goods report and 2nd quarter GDP at the end of the week. A significant positive surprise in either report could stem our current rally, but I think that’s unlikely. Finally, we have end-of-month position squaring, which tends to provide temporary support for rallies. My conclusion is that lower rates are certainly possible this week, but if you’re floating your rate, watch for headlines that would signal a reversal of fortunes.

Rate update: Policital uncertainty means lower rates

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Jul 182017

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By G. Steven Bray

The strongest gorilla in the room for mortgage rates still is the European Central Bank, but US political uncertainty has been pumping iron.

Back in Jun, the head of the ECB caused a quick rate spike suggesting the ECB will start tapering its asset purchases soon. While this really shouldn’t have surprised anyone, markets didn’t appreciate being faced with reality. The ECB promptly tried to walk back the idea, but markets know the taper is coming.

The ECB meets again this Thurs. Markets don’t expect a tapering announcement yet, but any shift in language will be parsed for hidden meanings. If the ECB is mum about tapering, it could add to the recent positive momentum for rates.

That momentum seems to be the result of soft US inflation data and relatively dovish comments from the Fed. The inflation data is old news, but it’s still very relevant. The Fed comments represent a shift, especially Fed Head Yellen’s Congressional testimony that the Fed is very close to what it considers a neutral policy rate, meaning the Fed is almost done hiking rates.

The new gorilla is US political uncertainty, and it could provide downward pressure on rates for the next few months. The Senate pulled the Obamacare replacement bill, which only adds question marks for the rest of this year’s Congressional agenda. Congress wants tax reform; Congress should pass a budget; Congress must deal with the debt ceiling – all of this by the end of Sep?

Rate update: European tantrum boosts US rates

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Jul 102017

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By G. Steven Bray

Last week’s jobs report was surprisingly strong, but bond markets hardly noticed. Instead, they seem to be laser-focused on the prospects that the European Central Bank will curtail its asset-purchase program.

It may seem odd that something seemingly so distant could impact US mortgage rates, but that’s the effect of interconnected global markets. The yield on the German Bund, considered the safest European debt, jumped right after the ECB announcement. US Treasury and mortgage rates also hopped on board the panic train, but the distance limited the damage.

The ECB announcement indicated that at some point the ECB would have to stop pumping money into the EU economy. The ECB immediately tried to back-peddle to calm markets, but the damage was done. Markets know the party eventually will end, and the ECB must be thinking about the end, or it wouldn’t have made the statement.

For those wanting rates to fall again, the glimmer of hope is recent inflation data. The Federal Reserve’s target rate is 2%. Inflation hasn’t been that high in years, and recent data shows inflation heading down again. This may give the Fed a reason to pause its plans to hike rates and shrink its balance sheet, which would be positive for rates. Markets will be listening carefully to Fed Head Yellen this week during her Congressional testimony for any signs the Fed’s plans may be changing.

Rate update: Stay cautious, my friend

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Jun 282017

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By G. Steven Bray

Mortgage rates remain near their lows for the year and still are looking for a source of inspiration. That inspiration could lead rates lower or higher, so let’s look at the possibilities.

We have two main foci at this point: economic data and central bank chatter. Recent US economic data, except for housing data, has been surprisingly weak. Particularly interesting for bond markets has been inflation data, which once again is below the Fed’s target of 2% and has been trending down. The Fed’s favored measure, the PCE index, is released this Fri. If it confirms the decline, rates could improve.

Next Fri, we get another jobs report. The last two have been a bit stinky. Another month of sub-par job growth really could rattle markets and rally rates further.

Our other focus is central bankers. Federal Reserve governors finally are acknowledging declining inflation, but so far the official line is that this is a temporary phenomenon. As such, only a few governors are suggesting the Fed should pause its rate-hike plan, which is keeping some upward pressure on rates. It didn’t help that yesterday the head of the European Central Bank (ECB) said he believes the inflation dip is transitory, and he expects inflation to accelerate.

I still recommend that you stay cautious if you’re floating your rate. I think it would take less inspiration for rates to move higher.

Rate update: Be defensive after rate rally

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Jun 192017

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By G. Steven Bray

The Federal Reserve gave us an unexpected surprise last week by announcing details of its balance sheet reduction plan. The Fed has been the main buyer of mortgage bonds, and the concern is that when the Fed curtails its buying, the law of supply and demand will push mortgage rates higher. Even though the Fed didn’t give a start date for the plan, markets are anticipatory, and the news immediately put pressure on rates.

And that probably would have been the news of the day if not the morning’s economic data. Continuing a recent trend, the two reports, inflation and retail sales, both were weaker than expected. The inflation number was particularly disconcerting given that managing inflation is one of the Fed’s mandates. Core inflation dropped again to 1.7%, falling farther from the Fed’s 2% target.

As a result, interest rates were in rally mode by the time of the Fed announcement. The announcement stemmed the rally, but the damage could have been worse. The Fed merely paid lip service to recent economic data and didn’t change its rate hike outlook at all. Despite this, rates held onto most of their gains.

Unfortunately, this leaves us without a sense of direction for rates. This week’s economic calendar is fairly quiet, and if you’re floating your interest rate, I think it makes sense to be defensive. Rates could fall further, but that probably requires an unexpected headline in the short term. If you want to float, choose a bail-out point and keep an eye on rates.

Rate update: Will this be the last Fed rate hike?

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Jun 132017

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By G. Steven Bray

This could be a busy week for bond markets. The marquee event is the Federal Reserve meeting. The Fed announces the results of the meeting Wed afternoon followed by Fed head Yellen’s news conference. While a rate hike seems a near certainty, it’s unlikely to have much effect on longer-term rates, like mortgage rates. Markets priced in the rate hike a while ago. Instead, markets are interested in what the Fed thinks about the state of the economy and how it plans to shrink its massive bond portfolio. Markets may react to any changes to the Fed’s rate hike outlook. If the outlook is less aggressive, I expect the rate rally to resume. Markets don’t expect the Fed to provide more details about unwinding its portfolio, and any variation from expectations could make rates jump.

Other than the Fed meeting, this week is full of important economic reports. Two of the biggest reports, the consumer price index and retail sales, will be released Wed morning before the Fed announcement. It’s likely markets will mostly ignore the reports in favor of waiting for the Fed. That gives the Fed announcement and press conference that much more potential oomph. If the reports differ greatly from expectations, consistent sentiment from the Fed could give the market extra momentum in the same direction.

Rate update: Fed meeting may break rate momentum

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Jun 072017

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By G. Steven Bray

Last Fri’s weak jobs report sent rates tumbling to their lowest levels of the year. It wasn’t just that the May number missed expectations by about a third, but the reports for the prior two months were revised lower by 66k jobs. First quarter job growth averaged a meager 121k per month.

Investors are weighing whether this is just another economic soft patch or if the economy has turned. While other economic data has been mixed for many months, respectable job growth has buoyed consumer and business sentiment. The concern is that weaker job growth could cause consumers to pull back making economic weakness a self-fulfilling prophecy.

With this as a backdrop, let’s look at the other factors affecting rates in the next couple weeks. This Thurs is a trifecta of potentially rate-moving events. First, we have the British elections. A surprise result could be unsettling for markets, but I think the chances of that are small. We also have the European Central Bank meeting. An announcement that the ECB will tighten monetary policy could push rates higher, but that doesn’t seem likely. Finally, we have the Comey testimony before the Senate. The media frenzy surrounding the investigation still has markets on edge. If the testimony is a dud, look for some of the recent momentum towards lower rates to dissipate.

However, probably a more important event is next week’s Fed meeting. It’s rather certain the Fed will raise short term rates once again, but markets are more interested in what the Fed says about recent economic data, especially weak inflation data, and its plans to reduce the size of its bond holdings. If the Fed ignores recent weakness, it could pressure rates higher. Between now and then, I really don’t expect rates to move a lot. Investors are unlikely to take extreme positions until they hear what the Fed says.