Rate update: Tariff Twitter good for rates

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Tariff Twitter good for rates
Jun 192018
 

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

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

 Interest Rates, Residential Mortgage  Comments Off on Rate update: The Quitaly effect
Jun 052018
 

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

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.