Oct 262016
 

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By G. Steven Bray

You can tell the European Central Bank is run by bureaucrats. Markets were expecting a straightforward answer on whether it will start to taper its asset purchases. Instead, we got a “not ready to tell you yet.” The market reaction was a muted sigh. On the one hand, it’s positive the ECB hasn’t decided to start tapering. However, punting the decision to another day just prolongs the anxiety.

It sounds like that other day will be the ECB meeting on Dec 8th at which time the head of the ECB has promised to let us know whether it has decided to continue or taper asset purchases. Interestingly, the Fed meets the week after that. It’s a good bet that if the ECB starts to taper, the Fed will raise short-term rates.

But that’s in the future, and remember that short term rates don’t dictate the medium-term direction of mortgage rates. What are rates going to do between now and then? Absent some extraordinary stimulus, I don’t think much. I think the market has a slight bias for higher rates at this time, but I bet 30y rates will stay well under 4% between now and the meetings.

Even so, upcoming events can cause volatility. The biggest economic news this week probably comes Fri with the Durable Goods and 3rd quarter GDP reports. A large departure from the expected 2.5%, plow horse growth could spook investors. Next week, the Fed meets. While no one expects it to change policy at this meeting because of its proximity to the election, the post-meeting statement could be interesting. The Fed used the statement at last year’s next to last meeting basically to announce it was raising rates in Dec. And, of course, the election is the following week, and there’s no telling how investors will react to the results.

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