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.

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.

Rate update: Uncertainty leading to lower rates

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Sep 052017

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By G. Steven Bray

Mortgage rates continue at their lows for the year, and it has some market watchers scratching their heads. The economy continues to chug along at a reasonable clip, and central bankers are dialing back stimulus programs, signaling they think the growth is self-sustaining. This should give rates a lift.

Instead, we have a confluence of news and events that has markets increasingly on edge. For weeks now we’ve had US political uncertainty. Congress is back from vacation, and it has a huge to-do list for Sep, including preventing a government shutdown. Given its inability to get any major legislation passed this year, markets are understandably nervous, and legislative sausage-grinding will keep them that way.

North Korea hit the headlines again this week. The intractable nature of that situation and the more strident attitude of the Trump administration will help bond purchases, keeping downward pressure on rates.

Harvey and now Irma are unsettling factors. While they shouldn’t derail the economy, the storms impart an emotional cost that leaves everyone feeling a little more vulnerable.

The fear is that the persistence of these factors could erode consumer and business confidence, leading to a weaker economy. That would lead to lower rates, but for an unwelcome reason.

The one scheduled event this week is the European Central Bank meeting. The ECB is expected to discuss curtailing its stimulus program at the meeting, and an announcement to that effect could pressure rates a little. However, it may have a hard time overcoming the factors pushing the other way.

Rate update: The end of vacation season could stir interest rates

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Aug 292017

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By G. Steven Bray

With one week before Labor Day, we could be at the end of the summer slumber for interest rates. Typically, we’d expect market activity to increase with an end to the vacation season. However, this year, that natural increase is augmented by expectations for central bank announcements.

First up is the European Central Bank, which meets next week. Unlike the Federal Reserve, the ECB still has its money pumping spigot in full geyser mode. With European economies showing signs of life, expectations are that the ECB will begin to reduce the flow. When that happened in the US a few years ago, interest rates spiked for a few months. White ECB actions mainly affect European rates, we’d see some spillover effect in the US.

The Fed meets in the middle of the month, and markets expect it will announce the beginning of its balance sheet reduction plan. While the mechanics of the plan are known, some analysts think markets aren’t pricing in an imminent start point. If that’s true, and the Fed begins the taper right away, rates could bounce higher.

But this week’s economic data could temper all that potential excitement. This is a jobs report week, and we get the PCE data, the Fed’s preferred measure of inflation. If both are weak, especially the inflation data, rates could improve, not only because of the data, but because of its potential influence on the Fed’s tapering plans.

Rate update: Eclipse lulls market to sleep

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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.

Rate update: All eyes on inflation data

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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.

Rate Update: Is it a little too quiet?

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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.