Dec 042017

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By G. Steven Bray

For the direction of mortgage rates, it’s mostly about the tax reform bill. When passage of the Senate version looked imminent, rates jumped up to the highest levels in a month. As we discussed last time, markets equate tax cuts with higher growth and potentially higher inflation, which correlate with higher interest rates.

It appears it will take a couple weeks for the House and Senate to reconcile their plans, and during that time, I don’t expect a lot of rate movement, absent a bombshell headline, even though this Fri we have the Nov jobs report and next week a Federal Reserve meeting. These are usually top tier events attracting the careful attention of investors. However, this month they’re liable to cause nary a stir.

The jobs report hasn’t seen much reaction from markets in months. It continues to show the economy plugging along. It would have to miss expectations badly to turn heads.

The Fed meeting has more potential because of the post meeting commentary. Markets are pricing in a nearly 100% chance of a rate hike, but investors think the tax cuts can negate any drag on the economy from higher rates. However, the commentary could shed more light on the Fed’s future plans or its thinking on inflation trends, either of which could move the market.

Rate update: Watch out for tax reform

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Nov 222017

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By G. Steven Bray

It’s Thanksgiving week, and bond markets are pretty quiet. Rates are bouncing around in a very narrow range as they’re apt to do when everyone is full of turkey. However, that quiet may belie building pressure to move interest rates.

The biggest motivator of movement is the tax reform plan. As it sits now, markets seem cautiously optimistic that something will come of Congressional action. That optimism seems to have placed a floor under rates, but the caution is keeping them from moving much higher.

In simple terms, a large part of the tax plan is tax cuts. Tax cuts typically boost economic growth. Economic growth creates competition for goods (such as employees and raw materials), leading to higher prices for those goods. Higher prices, aka inflation, are the enemy of low interest rates.

At least that’s the way it seemed to work in the past. The world seems awash now in many raw materials, so higher growth might have a minimal impact on their prices. And the Philips Curve, which basically says low US unemployment should lead to higher wages, seems to have less relevance due in part to globalization.

That said, if the Senate next week seems to be coalescing around a tax plan, any tax plan, I expect rates will edge up a bit.

I wish you and your family a blessed Thanksgiving.

Rate update: rates caught in an updraft

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Nov 152017

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By G. Steven Bray

Did you catch the dip in mortgage rates last week? It was sweet while it lasted. Rates bumped back up at the end of the week.

If you didn’t catch it, let’s see what the crystal ball holds for rates going forward. Markets seem focused on two issues:

– The first is inflation. Despite the unprecedented efforts of the Federal Reserve, inflation has been virtually non-existent throughout this recovery. The Fed has a target rate of 2%, and the Fed’s favored measure, the PCE, hasn’t been that high in a long time.

This morning, we got the Oct Consumer Price Index. While this isn’t the one the Fed watches, it has historical significance, and markets pay attention. Several other inflation metrics recently have indicated budding pricing pressure, but the CPI remained pretty tame with core inflation still under 2%. So, while markets wait for the next inflation report, they’ll probably turn their full attention to the second issue.

– And that is tax reform. Given the current positive momentum, rates are feeling an updraft. Granted the House and Senate plans differ, but I don’t think markets are particularly concerned about which plan wins. They only care about the boost that lower tax rates will give the economy. And an economic boost should pressure interest rates higher.

Of course, one scary headline could quickly deflate this momentum. But absent that, I suggest you remain defensive for higher rates.

Rate update: Fed nomination is a chance to lock your rate

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Oct 312017

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By G. Steven Bray

If you haven’t locked your mortgage rate, this week could provide a great opportunity. Interest rates have been on a gentle path higher since early Sep. Markets generally are reacting to positive economic data and the possibility of tax reform.

This week should provide four big headlines that could move rates, and two involve the Federal Reserve.

The Fed meets this week for its next to last meeting of the year. Pretty much no one expects the Fed to change short term rates Wed, but analysts will slice and dice the post-meeting announcement to try to predict the Fed’s future actions. Of particular interest will be any reaction to persistently low inflation.

The second Fed headline is the expected nomination of the next Fed chair. Trump is expected to nominate Jerome Powell. Powell is seen as more likely to keep interest rates low and friendlier towards measured deregulation. Markets also like that he already is a Fed member, which provides some continuity. Rumors of his nomination pushed rates down Fri and Mon, but it’s quite possible the actual announcement could bump rates still lower.

The third headline is the tax reform plan, expected on Wed. Rumors are circulating that the tax cuts could be implemented in a staggered fashion over five years. While markets still will view the cuts as positive for the economy (and bad for rates), up until now they’ve been trading on expectations of an immediate economic boost. A staggered rollout would dampen their enthusiasm and could be positive for rates.

Our final headline is probably the least important, which is funny because it used to pack such a punch. Friday, we’ll get the monthly jobs report. Markets are expecting the report to show 300k jobs created in Oct. I think the report would have to miss the mark significantly for markets to even care.

All of these headlines overlay the factors we’ve discussed the last few weeks. Economic sentiment remains frothy in markets and among consumers. Inflation is minimal, and expectations are it will remain that way. Markets are mostly ignoring other news, both domestic and overseas. The takeaway is that this week’s headlines could bump rates lower, but be prepared for them to rise again once the headlines fade.

Rate update: New Fed chair could be unfriendly for low rates

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Oct 252017

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By G. Steven Bray

If you’re still floating your interest rate, you may be kicking yourself this week. Mortgage rates have risen 1/8% in the last week. While rates still are very low by historical standards, they’ve been fairly stable lately, making the rise seem rather abrupt.

Last week I recommended caution if you’re watching rates, and I’ll reiterate that this week. I don’t believe the forces pushing rates higher have subsided just yet. Sentiment still seems frothy, which negates the effects of factors that would limit rate increases, such as persistently low inflation.

In addition, we’ve added a couple other factors that seemingly work against lower rates. First is the nomination for Chair of the Federal Reserve. Trump is said to be seriously considering two individuals: John Taylor and Jay Powell. Markets consider Taylor to be less friendly towards low rates. Trump said he is “very, very close” to deciding, and it was reported he asked senators at lunch Tues if they approved of Taylor. The response from senators was positive, and markets took notice.

The second factor is a pending announcement from the European Central Bank. The ECB previously promised it would let us know about its plans to taper its bond buying program after tomorrow’s meeting. ECB bond buying is akin to the Fed’s quantitative easing, which led to record low interest rates. It’s not certain what if anything the ECB will announce, but markets are hedging for the worst.

Rate update: Low inflation checks interest rates

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Oct 172017

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By G. Steven Bray

Interest rates received a nice surprise from inflation data last Fri. Last week, we discussed that several inflation metrics are showing budding inflation, especially at the producer level. We also discussed how producer inflation doesn’t always translate into consumer inflation, and that’s what we saw last week.

The consumer price index, the godfather of inflation measures, showed that core inflation actually rose at half the expected rate and stubbornly remains below the Fed’s target rate of 2%. Maybe just as important, consumer’s expectations for future inflation fell significantly, and this was despite the hurricane-induced increase in gasoline prices.

Well, bond markets liked this news enough to stop their march towards higher interest rates, but it wasn’t enough to ignite a new rally. Economic optimism is fairly pervasive at the moment, and with the White House and Congress singing Kumbaya together around the campfire, I think it would take a surprise event to deflate that optimism.

Short term I still recommend caution. There’s less friction for rates to move higher than lower. In other words, a less significant event, such as progress on tax reform or another hot inflation report, could move rates quickly higher.

Longer term, I think the chances for low rates still are good. The prospects of rising inflation and stronger economic growth helped lift rates off their recent lows, but they’re still only prospects. Most economists are predicting mediocre growth and low inflation for the coming year, and that would support our current low rates.

Rate update: Budding inflation leading to higher rates

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Oct 102017

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By G. Steven Bray

Bond markets got spooked last week, and interest rates moved higher. The media blamed the move on many things, but I think the underlying motivation is fear of inflation. While the Fed’s favored inflation metric, the PCE, continues to show negligible inflation, some other measures are beginning to show pricing pressure.

The first hint was the consumer price index a couple weeks ago, which showed consumer inflation approaching 2% again. Some analysts discounted the reading due to potential effects of Hurricane Harvey; however, the rise was greater than expected.

Very strong Manufacturing and Non-manufacturing surveys followed last week. The internals of both reports showed businesses reporting significantly higher input prices. While these pricing pressures don’t always percolate up to consumer prices, the magnitude of the increases was disconcerting.

The topper was the jobs report last Fri. The headline numbers were contradictory. The business survey showed the economy lost 33k jobs, but the household survey showed it gained about 900k. But what caught my eye was the impressive 0.5% monthly wage growth. Economists have been predicting low unemployment would push wage growth for years now, and we finally may be seeing it.

But, as I’ve said before, one month doesn’t make a trend, so it will be interesting to see if the readings remain higher once the effects of the hurricanes dissipate. It also will be interesting to see if consumer sentiment surveys begin to show expectations of higher inflation. If expectations start to align with economic reports, higher inflation could get locked into place.

Could rates move lower again? Sure they could, especially given all the potentially explosive issues facing the world. But I suggest you stay defensive unless and until you see rates heading down again.

Rate update: If Rocketman only knew

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Sep 262017

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By G. Steven Bray

The Federal Reserve sounded slightly more optimistic about the economy last week, and bond markets had a fit. The fit didn’t last long, but it was enough to put a dent in our recent rate rally.

Looking at the specifics:

– The Fed said it will start trimming its enormous balance sheet by reducing the amount of bonds it buys each month. It still will take the Fed many years to normalize its balance sheet, and markets fully expected this announcement, so its effect was minimal.

– The Fed indicated that it’s likely to raise short term interest rates again in Dec and that it expects the economy to chug along despite the recent disasters and low inflation. Markets didn’t expect this, which probably caused the fit. Chances of a Dec rate hike as measured in the market went from around 25% to around 75%.

But a good weekend’s rest and some elevated rhetoric from North Korea seem to have calmed the nerves, at least with respect to interest rates.

This week has some moderately important economic data. Any evidence of weakness or falling inflation could reignite our rally. Is that likely? I wouldn’t count on it; however, new North Korea headlines could pressure rates lower through flight-to-safety bond buying. We’re also at the end of the month, which tends to see bond purchases to rebalance portfolios. That can help keep a lid on rates.

Rate update: Markets waiting for this week’s Fed meeting

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Sep 192017

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By G. Steven Bray

All eyes are on the Federal Reserve again this week as it meets to discuss monetary policy. The Fed isn’t expected to change interest rates at this meeting; however, markets do expect it to announce when it will start reducing its massive portfolio of Treasury and mortgage bonds.

The Fed already has broadcast the details of the plan, which actually won’t result in the Fed selling any bonds. Instead, it will buy less, allowing run off to slowly reduce the portfolio over time. Less Fed buying could put a little upward pressure on rates in the coming months; however, given that markets have known the plan’s details for a while, I suspect current bond prices already reflect that.

I think it’s more likely reduced Fed buying will weaken its shock-absorber effect. Positive news, such as higher wages or world peace, normally lessens the demand for bonds, but the Fed has been there for most of the past decade to pick up the slack. Without the Fed, rates may bounce a little higher on such news.

I think markets will pay more attention to the Fed’s post-meeting rate projections and Fed head Yellen’s press conference. Last week’s inflation report, which showed the first uptick in a while, gave the Fed a little cover if it chooses to raise rates again this year. I’m sure markets will be very interested to know what Yellen and the other governors think about the prospects for inflation going forward. Should the Fed drop its recent concern over persistently low inflation, rates could jump.

Rate update: Tensions relax and rates rise

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Sep 122017

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By G. Steven Bray

Mortgage rates bounced off their low for the year last week. While the bounce reflects a relaxation of the uncertainties we’ve discussed, the broader trend for rates still is favorable.

First, let’s look at the reasons for the bounce.

– Congress kicked the can down the road on funding the government and the debt ceiling. While calling this a legislative success would be an insult to failure, it may allow Congress to focus on tax reform, which in a roundabout way pressures rates higher.

– Irma, while still a damaging storm wasn’t the disaster weather guys and gals were predicting last week. The storm’s damage undoubtedly will be counted in billions of dollars, but markets are breathing a sigh of relief that it wasn’t worse.

– North Korea surprisingly decided to celebrate Founder’s Day without fireworks. After the recent nuclear test, the world seemed convinced the Koreans would shoot another ICBM into the Pacific on Sat. When that didn’t occur, the world exhaled.

So, fear and uncertainty are waning. That leaves our focus for the moment on inflation and the Federal Reserve. We get the Consumer Price Index this week. While it’s not the Fed’s preferred measure of inflation, it’s got street cred. Expectations are the report will show a continued absence of inflationary pressures.

That may factor into the Fed’s decisions at its meeting next week. Analysts aren’t expecting a rate hike, but they do expect the Fed to announce a start date for reducing its balance sheet. Markets, however, will probably focus more on the after meeting statements. If the statements suggest a more cautious Fed, rates could improve. Alternatively, if the statements suggest full-steam-ahead, they could end our summer rate rally.