Bulls & Blogs

Rate update: Will the Fed surprise us?

Interest Rates, Residential Mortgage Comments Off

Jul 232019

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By G. Steven Bray

Interest rates have settled back into a narrow range while markets await the Federal Reserve meeting next week. The Fed has strongly telegraphed its intention to cut short term rates, and recent positive economic data has convinced markets it will only be a quarter point cut. So, with that decided, what possible motivation could rates have to move?

Well, I’ll give you a couple, but I think they’re outliers. The first is headlines from the Middle East. So far, the US and its allies seem content mostly to ignore Iran’s provocations, allowing the punishing economic sanctions to continue to work. Should Iran get more desperate and start a shooting war, interest rates will tumble quickly.

The second is the Chinese trade tiff. I’m calling it a tiff because despite the doomsday prognostications from the experts, the damage to the US economy seems to have been quite limited. The Chinese economy, on the other hand, seems to be suffering. Should the Chinese finally decide the pain is too great and strike a deal, it will relieve some of the uncertainty that’s been keeping rates low.

Absent those events, I think it’s a balancing act between weakening foreign economies and the still-strong US economy. And as long as we remain in balance, rates really don’t have any motivation to move.

Rate update: Choppy waters ahead

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Jul 162019

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By G. Steven Bray

Following the surprisingly strong jobs report at the beginning of the month, mortgage rates have started edging up again – but without conviction. Rates are being affected by several factors right now, and those factors seem fairly balanced.

On the one hand, we have deteriorating economic conditions in Europe and China worrying investors of a global economic slowdown, which would push rates down. The Federal Reserve has acknowledged this ‘fear factor,’ which made markets very happy a couple weeks ago and supported lower rates.

On the other hand, US economic conditions remain healthy, as evidenced by the strong Jun jobs report earlier this month and today’s very strong retail sales report. On top of that, the inflation report last week came in a tad higher than expected, and inflation is the big enemy of low interest rates.

I expect rates to remain choppy and noncommittal until the end of the month when the Fed meets again. Based on Fed head Powell’s Congressional testimony last week, markets fully expect the Fed to cut short term rates by 25 bp at that meeting, so that action probably won’t move the needle. However, if the Fed fails to cut rates or cuts more than expected, watch out. And we’ll talk about those possibilities in the upcoming weeks.

Rate update: Rates are heading lower

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Jun 012019

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By G. Steven Bray

Interest rates have had an impressive rally the last couple weeks as investor sentiment has become decidedly dour. The rally began in earnest when the Chinese blew up the trade deal, but it’s taken on renewed life as talking heads have started tossing around the “R” word again.

Unfortunately for economic growth, now they have something on which to hang their hats. While employment growth and consumer sentiment still appear strong, some economic activity indicators are pulling back.

This may be a manifestation of the trade war, which means it could reverse if negotiators are able to craft a deal soon. However, other economies, particularly those of China and Germany, are slowing even more quickly. We may already be past the point of no return in terms of the next recession overseas.

So, what does this mean for mortgage rates? If you like lower rates, it’s all positive. It’s quite likely we haven’t seen the lowest rates of the year yet.

That said, it may take a while before that happens. It’s long-term Treasury rates, which readily respond to economic conditions, that have fallen so much recently. Mortgage rates are lagging behind for reasons that aren’t likely to change soon.

Even so, investor sentiment is such that traders may ignore a positive economic report, such as next week’s jobs report, and keep rates in their current, lower range, and over time, mortgage rates will catch up.

Rate update: The trade war blues

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May 212019

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By G. Steven Bray

Mortgage rates have moved very little this month, and it still seems like their next move is tied to the trade war. The announcement of new tariffs on Chinese goods created a nice little rally that brought rates down close to their lows for the year. But lately, it seems like every negative headline has been met with a conciliatory one, which has kept rates stable.

There is other news out there, and absent the trade headlines, it might move rates. Probably the most significant is the action in the Middle East. A new fighting war would roil markets everywhere and lead to lower rates.

Europe also has current crises of note. Great Britain still has a Brexit problem – deciding how it’s going to leave the European Union. Italy, on the other hand, just thumbed its nose at European Union austerity rules, and pundits once again are talking about the survivability of the EU.

In the US, we’re watching for economic data that indicates something other than a steady as she goes economy. The next big reports aren’t due for a couple weeks, culminating in the May jobs report due on Jun 7th. Analysts aren’t predicting any surprises based on recent economic activity.

And that brings us back to the trade war. Barring something extraordinary happening elsewhere in the world, I think the fate of interest rates depends on the success or failure of trade talks. Resolution would remove the biggest uncertainty for the economy and almost certainly would lead to higher rates.

Rate update: Trade war is our headliner again

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May 072019

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By G. Steven Bray

Last week’s two big ticket items, the Federal Reserve meeting and the jobs report, lived up to their billing. The Fed didn’t change policy, nor did the post-meeting announcement really make any waves. It was Fed head Powell, at his post-meeting press conference, who got things moving. He acknowledged that foreign economies look a little stronger than earlier in the year and was equivocal when asked whether the next rate move would be a cut or a hike. (Investors have been hoping for a cut.) Interest rates quickly bounced higher.

Then, we got the jobs report on Fri. The headline numbers were great: a solid beat on jobs created and the lowest unemployment rate in 50 years. However, wage growth was tepid, reinforcing concerns about falling inflation (which tends to depress rates). On top of that, the services sector report missed expectations. Interest rates edged down again, and it looked like we’d be riding the range a while longer.

This week set up to be rather quiet until Friday’s inflation report – until the Chinese pulled away from trade negotiations. Markets have been hopeful for a trade deal, so the president’s threat to impose new tariffs created waves of uncertainty. Investors responded to that by buying bonds, which pushed rates down.

So, where do we go from here? Given that multiple recent economic reports have agreed about receding inflation, it’s unlikely Friday’s Consumer Price Index is going to have much effect on rates. If the index surprisingly doesn’t agree with the other reports, rates may tick up a bit.

However, I suspect rates will rise or fall based on the trade talks. A further breakdown is bound to make investors nervous about a full blown trade war, leading to lower rates.

Rate update: Stuck in the middle again

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Apr 122019

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By G. Steven Bray

After a quick move lower following last month’s Federal Reserve meeting, mortgage rates have moderated a bit. Concerns of a global recession prompted the move lower, and the Fed seemed to add fuel to that concern with the changes to its policy stance, announcing what is in a sense version 5 of quantitative easing, which has helped keep rates low for years.

Rates rebounded a bit when investors realized the US economy certainly isn’t circling the drain. We’ve had two strong jobs reports, and retail sales rebounded after the government shutdown. The data isn’t as strong as it was last year, but it certainly doesn’t seem to indicate an imminent recession.

Overseas is another story. At its meeting this week, the head of the European Central Bank all but predicted a recession in Europe, and European economic data continues to weaken. Britain still hasn’t figured out how it’s going to leave the European Union, which breeds uncertainty, a close friend of low interest rates. And China’s economy also is slowing, and analysts worry that a resolution to the trade dispute may not be enough to stop the slide.

So, that’s the bad news – the news that’s pressuring rates lower. But investors see a US economy that seems to be chugging along. Thus, rates are stuck in the middle – not sure which force is going to be stronger. And they’re liable to stay that way until new headlines tip the scales.

Among the predictable headlines I’m watching right now are the Chinese trade talks and inflation data. I still believe a good trade deal penned in the next couple months will put some upward pressure on rates. However, it has to happen before the Chinese economy slips too far. On the inflation front, recent reports show inflation sliding lower again, which makes the Fed nervous. Receding inflation should put downward pressure on rates.

Rate update: 4 events that could break the range

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Mar 132019

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By G. Steven Bray

Still riding the range. It’s not a bad place to be when mortgage rates are the lowest they’ve been in a year. This range has held for an unusually long time, and we’ve been looking towards this month as the time when the range finally might break down. There’s no sign of that yet, but let’s review some events that could make it happen.

US economic data probably carries the greatest weight. Most of the data this year has shown continued economic strength – until the Feb jobs report. The report didn’t just miss expectations, it was anemic. Could it be an outlier due to the government shutdown or seasonal factors? Possibly. The Jan number was oddly high. Regardless, the weak jobs report combined with this week’s tame inflation reports have bond buyers in a frisky mood, and that’s good for interest rates. Any additional weak economic data likely will get the recession whisperers going again, and rates could break lower.

The other elephant in the room is the ongoing Chinese trade talks. I still think a trade deal is likely to pump up rates a bit as it not only will remove impediments to economic growth, it will remove the uncertainty that acts like a weight on rates.

Foreign economic uncertainty carries less weight, but its pervasiveness at the moment may be giving it an over-sized effect. Brexit talks continue to flounder, and a no-deal divorce between Britain and the EU is full of unknowns. The European Central Bank last week again lowered its growth estimates and discussed stimulus measures to shore up the European economy. Chinese growth has cooled significantly, and recent data shows its manufacturing sector in contraction.

Finally, we have the Federal Reserve meeting next week. The Fed had a large part in setting up the current range with its about-face on rate hikes following its Dec meeting. Markets currently see little chance of the Fed raising interest rates soon. Should the Fed’s post-meeting announcement suggest otherwise, rates could make a quick jump higher.

Rate update: Range is a nice place to be

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Feb 262019

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By G. Steven Bray

Mortgage rates remain range-bound, and fortunately for us the range is a pretty nice place to be. Rates are the best they’ve been since last summer. At some point, the range is going to break, so let’s look at the factors that may influence that break.

Rates hit their recent peak and started heading lower last Nov in response to stock market losses and concerns about the economy. The stock market has rebounded, and recent US economic data looks pretty rosy, so we don’t have those factors working for us anymore.

Trade concerns, especially the ongoing tariff battle with China, added uncertainty to the market, which put downward pressure on rates. However, it’s looking increasing possible that China and the US will resolve their trade issues and remove that as a factor.

Concerns about global economic growth have been a factor for a while, and those concerns seem to be intensifying. Recent data from Europe, China, and Japan have indicated weakening economies, and Europe still has its Brexit headache. Remember that slowing economies lead to less demand for money, which leads to lower rates.

But I’d say the biggest factor affecting rates right now is the Federal Reserve. It was the Fed meeting in Dec that put the exclamation point on the stock market swoon, and it was the Fed’s reaction to the swoon at its last meeting that solidified the current rate range. More recently, the Fed has hinted it may start buying bonds again, which would put more downward pressure on rates.

Despite those hints, Fed head Powell has been clear that the Fed is keenly interested in economic data (both US and global) and will respond accordingly. Most of the US data released this month was polluted by the government shutdown, and it won’t be until mid-Mar until that pollution clears – which could be the time rates finally leave the range.

Rate update: Investors think Fed is done raising rates

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Feb 122019

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By G. Steven Bray

The Federal Reserve gave rate watchers a great gift a couple weeks ago – assurances that it’s well aware of the potential for slowing economic growth. Markets reacted with a big rally, and analysts now predict the chances of the Fed lowering rates before the end of the year as high as the chances it will raise rates again.

However, lost in the excitement was the Fed’s reiteration that it will tweak its plans based on economic data. Two days after the Fed meeting, the Jan jobs report crushed expectations, and other economic reports showed the economy still seems to be humming along.

Investors still have other concerns: the government funding deal, the Chinese trade dispute, and weakening global growth. All have created uncertainty that’s counteracting the good news on the economy, and that seems to be keeping rates trapped in a very narrow range.

So, what to watch? Personally, I don’t think anyone in Washington wants another shutdown, and I think markets already expect the compromise to pass. Chinese trade, on the other hand, could be a market mover. As long as a trade deal remains elusive, I think rates will remain capped. If a trade deal happens, watch out for higher rates. Even then, I think global growth concerns will remain background uncertainty that keeps rates from rising too fast.

We have one other issue to watch. The Fed meets again in mid-Mar. Based on the Fed’s last post-meeting announcement and press conference, markets seem convinced the Fed has hit the pause button on tighter monetary policy. If the Fed’s dot plot in Mar continues to show more rate hikes, or if Fed governors over the next month backtrack on their earlier caution, look for rates to rise again.

Rate update: Rates couldn’t care less about the shutdown

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Jan 282019

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By G. Steven Bray

The end of the government shutdown removed one element of uncertainty for markets, but clearly it wasn’t a critical one as interest rates barely moved in response. I half expected a little volatility today, the first trading day after the government reopened. Instead, the day passed quietly. I suspect that’s because more important events await us this week.

First up is the Federal Reserve meeting, which ends on Wed. No one expects the Fed to change interest rates at this meeting, but pretty much everyone expects the Fed to soften its attitude towards future rate hikes. It also will be interesting to see what the Fed says about the effects of the shutdown. I suspect markets already have priced in a more dovish Fed. Thus, if the attitude, as reflected in the post-meeting announcement, hasn’t changed, watch out for higher rates.

Friday brings the Jan jobs report. No one knows exactly how the shutdown effected employment. While furloughed government workers were counted among the employed, employees of contractors that were sidelined by the funding lapse may have been counted as unemployed.

Analysts are predicting employers created about half as many jobs in Jan as in Dec; however, count me among the skeptics about whether analysts have captured the extent of the shutdown effect. One thing is likely: if the actual number of jobs differs significantly from the predictions, talking heads will do what they do best – talk – and markets will be choppy.

Finally, keep an eye on the China trade talks. Markets have been reacting to pretty much every headline the past couple weeks. That partly may have been because the shutdown bottled up economic data investors use to make trading decisions. However, I suspect markets would have been reacting anyway. Chinese economic data seems to show the trade war has significantly affected its economy. Positive headlines allow investors to think maybe the world’s economy isn’t really slowing, and equity markets rally in response. That’s been a negative for interest rates, and I suspect more positive headlines will bring more of the same.

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