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
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

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

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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.

Rate update: Rates on inflation watch

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Apr 102018
 

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By G. Steven Bray

Mortgage rates stayed in their very narrow range last week as the bond market weathered the wild swings in the stock market. Interest rates often benefit from big down days in equities, but the gyrations have become so routine that they’ve muted flight to quality bond buying that would benefit rates.

So, rates have budged little in about 2 months. What could change that?

We were watching last week’s jobs report as a potential catalyst. The jobs number was surprisingly weak, and wage growth was inline with expectations. Rates barely budged, probably because the weakness was attributed to weather.

This week we have two potential sources for upset, both on Wed. First is the Consumer Price Index. Markets have been poised for an uptick in inflation for months, which has kept some upward pressure on rates. Recent CPI reports have continued to show minimal inflation, but markets are anxious. A higher-than-expected reading on Wed could shoot rates higher and quickly.

The second potential source is the release of the Federal Reserve meeting minutes. The Fed verified that it’s on course to raise rates two more times this year, but some Fed watchers are convinced the Fed is secretly thinking three times. While the short-term rates the Fed controls don’t directly affect mortgage rates, the reason the Fed would add a rate hike – higher inflation or more robust economic growth – would add some lift to rates. Markets will be exercising their secret decoder rings to see if they can glean some hidden message in the minutes.

The risk for floating your rate is greatest Wed morning. If we don’t get any surprises, rates are liable to stay range-bound for the rest of the week.

Rate update: Higher wages mean higher rates

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Apr 032018
 

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By G. Steven Bray

It’s another jobs report week, and this one comes at an interesting time for mortgage rates. Bonds rallied at the end of Mar pushing rates down to their lowest levels in over a month, but the gains felt almost too good to be true.

Two factors seem to be supporting higher rates right now. First, we have a fairly robust economy. Job growth continues and, in fact, was quite strong last month. GDP growth looks like it will hit 3% this year. While housing data has been underwhelming, it likely is due to external factors, namely limited numbers of existing homes for sale and various impediments to building new homes.

The second factor concerns inflation. We’ve discussed this many times, and we also have discussed that so far most inflation reports continue to show an absence of significant inflation. But investors keep looking and looking.

And that brings us to the jobs report. Expectations are for continued strong job growth, so that shouldn’t stir interest rates much. However, I suspect investors will be keenly interested in another part of the report: wage growth. Remember that Jan’s report of higher wages caused rates to leap. Some of the air left that balloon last month when wages fell back again. So, which will it be this month?

I’d say the odds don’t favor floating your rate through the week. A higher wage growth reading is likely to cause more damage than you could gain from a lower reading.

Rate update: 4th Fed rate hike will spook rates

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Mar 202018
 

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By G. Steven Bray

The big financial news this week is the Federal Reserve meeting. The Fed is expected to announce a quarter-point increase in short terms interest rates. That shouldn’t cause even a ripple in mortgage rates as markets long have expected it. What could make waves is the press release and post-meeting press conference.

At this meeting, the Fed will update is economic projections by way of what’s called the “dot plot.” It shows what Fed governors predict short term rates will be over the next few years. The Fed has suggested it will raise rates three times this year, but markets are hedging for a fourth increase. If the plot confirms the hedge, we may see some upward pressure on rates.

After the meeting, Fed head Powell will hold his first press conference as Chairman. Markets will be keenly interested in what he has to say. Expectations are he’ll steer the same course charted by Janet Yellen. However, analysts will dissect his answers looking for change. They also will listen for his thoughts on the economy. Even an innocuous comment, as we discovered with his Congressional testimony, could create a market wave. I think the upside risk here is greater than the downside potential.

If the Fed doesn’t cause any waves, the rest of the week looks to be quiet. The Consumer Price Index last week confirmed that inflation remains tame. The headline rate printed at 2.2% while the core rate was 1.8%. The Feb jobs report showed wage inflation also pulled back. Both may give the Fed some breathing room to dismiss the fourth rate hike rumor, which took hold after the previous month’s heightened readings, and that could take some pressure off rates.

Rate update: Fed chair gives them something to talk about

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Feb 272018
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

For mortgage rates, the highlight of this week already has passed. It was the semi-annual testimony of the Fed Chair to Congress. This was Chairman Jerome Powell’s first experience at this dog-and-pony show, and he made it through mostly unscathed. Given the newness of his tenure, markets were watching carefully for anything that might suggest a change of course.

Unfortunately, Powell gave them something – probably unintentionally. He candidly stated that he thought the economy had strengthened since the Dec. That really shouldn’t be headline news, but markets interpreted his statement to mean the Fed is going to hike interest rates more than expected. Market rates immediately took off.

Was it a knee-jerk reaction? Probably. Rates recovered a little in the afternoon. Will we regain what we lost? Who knows? On the positive side, rates topped out at the top of their recent range before retreating a little. This gives us hope that markets have established a ceiling for now.

The rest of the week offers some more juicy economic data including 4th quarter GDP and consumer sentiment. However, I suspect rate movement is more likely to be dominated by end-of-month trade-flows, which can be unpredictable. If your rate isn’t locked, float cautiously. If rates break higher, I think we could lose another 1/8% fairly quickly.

Rate update: The case against higher interest rates

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Feb 212018
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Last week’s inflation report validated investors’ fears about inflation. It ticked up ever so slightly. Interest rates took notice and resumed their march higher.

Here’s what I find interesting about the recent rally in bond yields. The only thing that’s really changed in the last couple months, economically speaking, is the tax plan. While that may add to the Federal debt, we doubled the Federal debt over the last ten years, and markets seemed to shrug. I find it hard to believe they’ve suddenly found religion on the matter.

Some pundits also like to cite Trump’s infrastructure plan as ballooning the debt. It might or it might not, but right now it’s nothing more than policy position. I don’t think it can explain the big jump in rates.

So, that brings us back to inflation. Reported inflation did tick up, but the core rate still is under 2%. It’s likely the uptick is a result of a roughly 50% increase in the price of crude oil since last summer.

I’m not suggesting that you sit around waiting for rates to fall again. However, I am suggesting that the rise has more to do with market action than with economic fundamentals. If I’m correct, that at least gives us hope that the forces for higher rates will abate soon.

Rate update: Inflation: fear or reality?

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Feb 132018
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

After rising to the highest levels in over 4 years, interest rates are catching their breath, but I think it’s temporary. As we’ve discussed, the rapid rise seems to be predicated to a large extent on fears that inflation finally will come out of hibernation. Remember that inflation erodes the value of a currency. Thus, investors insist upon higher yields when they anticipate it.

I don’t think the fears are wholly irrational for reasons we’ve discussed, but the reality is we’ve seen very few signs of inflation so far. That could change tomorrow with the release of the Consumer Price Index. This isn’t the Fed’s preferred inflation metric, but being the granddaddy of inflation reports, it’s probably the one markets watch most keenly.

Unfortunately, I’m afraid the downside risk for this report is greater than the upside gain. By that, I mean if the reported value shows even a tenth of a percent increase, rates could quickly rise another 1/8%. If the reading is level or even slightly lower than last month, it should be positive for rates, but I don’t think they’re likely to fall very quickly. Markets seem convinced that inflation is out there hiding somewhere. I think it would take a few more months of continued tame inflation readings before markets will believe again that inflation is not a concern.

So, if you haven’t locked your interest rate, floating through tomorrow carries an outsized risk. If your outlook is a couple months into the future, there’s still hope. The longer inflation doesn’t materialize to validate market fears, the better the chances rates will find a ceiling and provide us with a bounce lower.