Rate update: Rates simply ran out of crises

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Sep 182018
 

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By G. Steven Bray

We were hoping last week’s inflation report would keep a lid on interest rates. Unfortunately, that lid didn’t hold, and we’re looking at the highest mortgage rates in about 5 years. Granted, rates still are historically low, but for some folks “rates in the 4’s” are now in the rear-view mirror.

So, what’s going on? We’re looking at a variety of factors.

– Even though last week’s inflation report was tame, inflation still is elevated compared to last year and supports the idea of additional Fed rate hikes.

– The Fed will again reduce its bond buying on Oct 1st as part of its efforts to shrink its balance sheet.

– Economic activity and consumer confidence have reached short-term highs, and a healthy economy tends to put pressure on rates.

– Wages finally seem to be rising, and rising wages typically filter through to higher consumer inflation and higher economic growth.

– Government borrowing to fund deficit spending means a greater supply of bonds as the Fed is tapering its demand.

Against this backdrop, we’ve had a series of mini-crises this year that kept investors on edge. Trade fears probably have been the most pervasive, but even the fear of with a trade war seems to be dissipating. The apocalyptic predictions didn’t pan out, and investors seem to be viewing the posturing as negotiating tactics rather than a real threat to the global economy.

Other threats still exist, and I think those will keeps rates from rising too much too fast. However, for now, if rates take a temporary dip, it probably makes sense to lock.

Rate update: Inflation rears its ugly head

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Sep 122018
 

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By G. Steven Bray

With summer behind us, things could get more interesting for interest rates. That may result in more volatility than we saw during the summer, but the same forces that were at work then remain relevant now.

Inflation remains enemy number one of those who want low interest rates. We’ve talked the last few months about how consumer inflation seems to be inching higher, but wage inflation has remained mostly contained. Well, that changed with last week’s jobs report. Average hourly earnings broke through an important ceiling, and rates quickly responded by moving higher. More importantly, total wages, which factors in hours worked, are up 5.1% in the past year. That provides a lot of extra juice for the economy.

Interestingly, earnings for workers in the bottom 10% based on income saw earnings grow 3.9% whereas the top 10% saw only 1.2% growth. That’s positive for the economy because lower income workers are more likely to spend their extra earnings.

Now, the question is will these extra earnings translate into extra consumer demand leading to higher consumer prices. We may get an answer this Thurs through the release of the Consumer Price Index. As we’ve discussed before, the CPI is the granddaddy of inflation measures. The core rate has been rising slowly all year and currently exceeds 2%, the Fed’s supposed target rate. It’s a good bet if Thursday’s reading shows another rise, it will give markets a jolt.

Markets also may be watching the European Central Bank meeting this week. European economic growth has been positive, but not all that and a bag of chips. Rumors are the ECB may downgrade its future growth estimates. That may result in some flight-to-safety bond buying, which could help keep US rates contained.

Rate update: Tariffs, Turkey, and Trump move rates

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Aug 282018
 

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By G. Steven Bray

Watching paint dry has been more exciting this summer that watching interest rates. Even the latest impeachment bait couldn’t get rates to move out of their current range. When will the boredom end?

If history holds any clues, probably sometime in Sep. Why Sep? Well, first of all, traders will be back at their desks trying to make money. Tradeflow movement in bond markets is more likely when there are, well, traders.

One of the events that might influence tradeflows is the Federal Reserve meeting at the end of Sep. The Fed is widely expected to raise short term interest rates once again, and market watchers will carefully parse the post-meeting pronouncements to glean whether another hike is likely in Dec. A couple of Fed members recently have cautioned against a Dec hike.

Before we get to the Fed meeting, we’ll see new inflation data in addition to more headlines concerning tariffs, Turkey, and Trump – and, of course, the mid-term elections. Trade deals with China and our NAFTA partners could remove some of the risk premium currently built into rates – edging rates higher again as we’ve seen the last couple days. If the Turkish crisis proves to be contagious, a new risk-off trade could lead to lower rates. And any political developments that investors believe could imperil the current economic boom would do the same.

I realize I’m being somewhat equivocal concerning the direction of rates, and that’s because I don’t see a lot of reasons for rates to move – except in response to headlines. If you’re floating your rate right now, consider that rates still are close to their recent lows, and I think it will take more significant headlines to move rates lower than higher.

Rate update: Tame inflation keeps rates in summer slumber

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Aug 092018
 

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By G. Steven Bray

Other than the short tantrum mortgage rates performed a couple weeks ago, the market has been in a summer slumber. And even that tantrum didn’t take rates out of the range they’ve inhabited the last few months. This week’s economic headliner could change that, but I doubt it.

Friday brings the release of the all-important Consumer Price Index (CPI), the granddaddy of inflation measures. Wholesale inflation, wage inflation, and oil prices all ticked higher earlier this year, and many analysts expected consumer inflation would follow in short order. We got a hint in that direction a couple months ago, which brought markets to attention.

However, since then, these other inflation measures have relaxed again. Wholesale inflation, released yesterday, and wage inflation, as indicated by the big jobs report last week, were flat. Oil prices, too, have flattened, and the Personal Consumption Expenditures Index, the broader inflation measure favored by the Fed, slipped back below 2%.

So, all eyes are on the CPI tomorrow. Given the weakening of the other measures, a reading that moves the index higher could make rates jump again. Unfortunately, a moderate reading probably won’t lead to much lower rates but will instead just let rates continue to slumber in their current range.

Rate update: Trade war vs inflation

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Jul 102018
 

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By G. Steven Bray

If you’ve been waiting to lock your mortgage rate, I have good news and bad news. The good news is that you haven’t lost any ground. Rates have been remarkably flat for the last few weeks. The bad news is that if you were hoping for lower rates, your hopes went unfulfilled.

Rates seem to be caught in a tug of war. On one side, we have trade war fears. Traders have been yo-yo-ing in response to constant headlines. Now, it’s quite possible that trading partners are using the headlines to manage their bargaining positions, but this leads to uncertainty, which exerts downward pressure on rates.

On the other side, we have inflation. The Federal Reserve’s favored inflation metric, the personal consumption expenditures index, finally rose to the Fed’s target of 2% in May. Analysts attribute the rise to the robust economy. Even though last Friday’s jobs report didn’t show elevated wage inflation, it did show that job growth remains strong. A strong labor market does exert pressure on wages in some parts of the economy even if the overall inflation rate remains tame.

So, which side will win? We could find out this week. This Thurs, we get the granddaddy of inflation reports, the Consumer Price Index (CPI). Analysts predict 2.3%, which is as high as the CPI has been since the Great Recession. A higher number could pull the rope in favor of inflation, leading to a quick jump in mortgage rates. However, a number that matches expectations probably will leave rates stuck in their current range for another couple weeks – waiting for the next headline.

Rate update: Tariff Twitter good for rates

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Jun 192018
 

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By G. Steven Bray

Rates have had it good lately:

– First up was the inflation report. It matched expectations. While this put the core rate at 2.2%, above the magic 2% mark, markets were worried it would be higher. Additionally, the Fed’s favored inflation metric, the PCE, continues to be below 2%.

– Next came the Federal Reserve. While the Fed raised short term rates as expected and increased the chances of a 4th rate hike this year, Chairman Powell said that he wasn’t concerned at all with inflation getting out of control and, maybe more importantly, that we’re getting closer to a “neutral Fed funds rate.” Analysts concluded that the trajectory of Fed policy is about as tight as it’s going to get, and bond markets sighed in relief.

– The next day brought the European Central Bank meeting. The ECB did announce it will end its asset purchase program by the end of the year, a negative for rates. However, it also said it doesn’t expect to hike rates until the end of next summer, and the ECB president made a case for economic weakness during his press conference. Bond markets cheered.

– Finally, we were treated to tariff Twitter. Markets don’t really care about the imbalances caused by prior administations’ trade policy. More important is the uncertain effects of the various proposed tariffs. I still say a full-blown trade war is unlikely. The targets of the tariffs have more to lose, and negotiation is the most likely outcome. However, the uncertainty may keep a lid on rates for now.

Rate update: The Quitaly effect

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Jun 052018
 

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By G. Steven Bray

As expected, the Italian drama was temporary, and interest rates moved back up last week. Fortunately, markets seem unconvinced that anxiety won’t return. Rates have leveled out for now during a fairly quiet week for economic data.

Next week could be a very different story. Both the Federal Reserve and European Central Bank meet, and output from those meetings has a high potential to affect the direction of rates. While it seems almost certain the Fed will raise short term rates again at this meeting, it’s Fed head Powell’s post-meeting press conference and the dot-plot that probably will garner the most market attention. Any suggestion that the Fed will be more aggressive could push rates back up to their recent highs.

I think the ECB has a greater chance to push rates the other way. It’s been hinting it will end it’s easy money policy in the near future. Confirmation of that is probably more likely than denial, but the ECB has been cagey in its responses to the rumors. It still could dissipate market energy without an outright denial.

Turning to economic data, we’ve been watching inflation lately. The PCE index, the Fed’s favored measure, continues to show tame inflation with the core reading still below the magic 2% mark. However, the jobs report showed wage inflation ticked up slightly. Other measures show even faster wage growth. As long as the PCE doesn’t accelerate, I suspect the Fed won’t change its rate hike trajectory, which is neutral for rates. However, if the Consumer Price Index starts to rise, it’s likely to change consumer and investor inflation expectations, and that would be bad for rates.

Rate update: Watch Italy if you want lower mortgage rates

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May 232018
 

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By G. Steven Bray

Last time we discussed the case for lower mortgage rates and the fact that unexpected headlines could put some downward pressure on rates. Well, that seems to be the case this week. In addition to news about trade negotiations with China, the Korean and Iranian nuclear deals, and the political drama in Washington, markets had to digest political headlines out of Italy.

Italian headlines affecting US mortgage rates? There’s a good reason for it, and one possible outcome could lead to significantly lower rates.

Italy recently held parliamentary elections with no party taking a majority. However, populist parties that generally oppose Italy’s membership in the European Union had strong showings, and two of them agreed to form a coalition government.

From a market standpoint, the EU represents stability. Much as the Brexit vote caused rates to plummet, an EU breakup could do the same. Italy is the third largest economy in the EU, and while it probably could survive Italy’s departure, that departure could cause other, smaller countries opposed to EU reforms to bolt as well.

For now, I think it would be smart to take advantage of the dip in rates as I think it will be temporary (absent more headlines). The coalition parties have pared back some of their more radical proposals, and it would take many months for them to implement the ones that remain. However, it’s another drip in the bucket trying to pull rates back down from their 7-year highs.

Rate update: The case for lower rates

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May 092018
 

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By G. Steven Bray

Mortgage rates seem to have plateaued again – waiting for the another source of inspiration to set them on a new course higher or lower. Which course is more likely?

The mainstream narrative is that higher rates are inevitable because of the factors we discussed a couple weeks ago, namely more government borrowing, less Federal Reserve accommodation, and continued economic growth.

These factors are undeniable. What we don’t know is the extent to which the market already has priced them in. Maybe rates have plateaued because they already reflect the risks associated with these factors. If that’s true, markets may increasingly pay attention to other factors that could lead to lower rates.

Consider the following:

– While the Fed’s favored measure of inflation, the PCE, moved higher, close to the Fed’s 2% target, it did so because very low inflation readings from last year are dropping out of the calculation. Moreover, transitory factors, hospital costs and oil prices, seem to be causing much of the recent rise.

– While the unemployment rate dropped below 4% for the first time since 2000, employment growth missed expectations for the second straight month, and wage growth also was below expectations.

– The economic expansion is long in the tooth. Talking heads increasingly are warning of a downturn just because it’s been so long since the last one. European economies already look softer.

– Global headlines are starting to grab market attention again. Israel is warning of imminent war in the Middle East, and the President’s withdrawal from the Iranian nuclear deal adds some uncertainty to the region. On the other side of the continent, while a trade war with China still seems unlikely, talk of it creates uncertainty, and uncertainty exerts downward pressure on rates.

– Finally, it’s probably not too soon for markets to start thinking about the effects of the mid-term elections.

I still think the upward forces on rates will remain stronger in the short term. However, absent some additional positive momentum, the chances are increasing that the next significant move for rates could be lower.

Rate update: The factors pushing mortgage rates higher

 Interest Rates, Residential Mortgage  Comments Off on Rate update: The factors pushing mortgage rates higher
Apr 262018
 

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By G. Steven Bray

Rates have risen to their highest level in 4 years. The 30-year fixed rate is toying with 5% again. So, is the magic over for the housing market?

That may be a tad melodramatic. The truth is we have several factors putting upward pressure on rates right now, and market sentiment seems to line up with those factors. The truth also is even at 5% rates still are historically low. While higher rates definitely impact housing affordability, recent history shows a robust housing market can be compatible with still higher rates than today.

So, what are the chances we see lower rates again? First, let’s review the factors pushing rates up.

– The government is borrowing more, and it finances that borrowing by selling bonds. Basic economics say more supply usually leads to lower prices, which for bonds means higher rates.

– The Federal Reserve is buying fewer bonds. Again, it’s basic economics. Less demand tends to result in higher rates.

– The Fed is hiking rates. While the Fed only directly affects short-term interest rates, its actions often put pressure on longer term rates.

– Finally, economic growth remains robust. While inflation still appears to be contained, history says economic growth can lead to inflation, which pushes rates higher.

It’s interesting the effect higher rates have had on what I’ll call market psyche. Most talking heads have been bemoaning the 10y Treasury bond rate breaching 3% again. I’ve seen several articles predicting doom and gloom ahead. The scary thing about this is that such talk, if it becomes prevelant, can become a self-fulfilling prophecy. I don’t see that yet. Consumer and business sentiment remains very high, but it will be important to watch that data going forward.

So, in the short term, I don’t see any reason to expect lower rates absent some extraordinary event that none of us wants. The course of rates later in the year likely will depend on how markets react to today’s elevated rates.