Oct 112016
 

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By G. Steven Bray

As I said last week, it looks like market sentiment has swung towards rising interest rates. Despite last week’s mediocre jobs report, rates have risen each of the last 9 days. Fortunately, the pace of increase has been fairly moderate, but so far, the market shows no signs of a reversal.

It seems the source for our discomfort continues to be the private musings of the world’s central bankers. Will they continue to pump money into the economy, or are they finally worried about the distortions that’s causing? Rumors that the European Central Bank might slow down the printing press started this market reaction a couple weeks ago. The good news is that the ECB meets next week, and it could put the rumor to rest. That could stabilize rates, but I doubt the market will reverse unless the ECB does something truly unexpected.

One other area of concern is inflation. Inflation has been almost non-existent for the last few years, but given the statistical quirks of the measurement and given recently increasing energy prices, inflation may tick up a bit in the next few economic reports. While I’m not sure that’s really significant for the economy, it could give the Federal Reserve cover to hike short term interest rates. Personally, I think the Fed’s itching to raise rates if for no other reason than to give it some ammunition in case the economy turns sour. I think the hike will happen in Dec, but between now and then, rates will be under pressure in anticipation. The funny thing is, though, a Fed hike in Dec could very well lead to lower mortgage rates early next year.

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