Mortgage rates edge higher ahead of Fed meeting

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Published Date 9/18/2017

Stock indexes better this morning; there is increasing speculation that the indexes continue to be over-valued hasn’t dented investors’ enthusiasm as new highs were set last week. The bond market, slightly lower prices with the 10-yr. note yield up 1 bp to 2.21% this morning, MBS prices at 9:00 -6 bps from Friday’s close.

This is Fed week, with the FOMC meeting beginning tomorrow and the policy statement and Yellen’s press conference Wednesday afternoon. The obvious and usual topic: what will the Fed say about the lack of inflation that has for reasons hard to square kept Fed officials up at night? The Fed’s balance sheet ($4.5 trillion) also in play with numerous comments recently that the central banks are about to begin unwinding it by lessening the reinvestments from payoffs of MBSs and maturing Treasuries. A couple of months ago, Yellen and Fed vice-chair Fischer were tossing around cutting MBS purchases by $4B a month and $6B of treasuries. Then about the economic outlook: the Fed will release its quarterly 2-yr. forecasts for GDP and inflation prospects. Markets will have a lot to chew over from the Fed on Wednesday.

Pres. Trump is speaking at the UN General Assembly; not likely to have any impact on markets, but his demeanor will be closely watched. In his speech at the NATO meeting, he was criticized for his tough comments, and his tweets don’t sit well with those diplomats that populate the UN, NATO and other global assemblies. His main address is tomorrow.

At 10:00 am EDT, the NAHB housing market index, expected at 66 dropped to 64, and August was revised lower to 67 from 68.

Technically, the bond and mortgage markets remain bearish for the near term (higher rates). We doubt much movement in the bond and mortgage markets now until Wednesday afternoon when the FOMC meeting ends, and Janet Yellen’s press conference. Speculation still centers around whether the Fed will increase the Federal Funds rate at the December meeting, and whether they will announce the beginning of tapering. The debate always increases going into a FOMC meeting. Good arguments can be made for the Fed to let markets know a rate hike is coming, and that the Fed is too concerned about the lack of inflation. Inflation concerns, always critical for fixed income markets, has tied central banks into knots over the last two years. The ECB, Bank of Japan and the Fed can’t explain the lack of inflation, somewhat refusing to see the obvious: no wage gains of significance compared to the last 70 years of economic recoveries, and without stronger improvements goods producers of everything from cars to Kleenex have no pricing power.

This Week’s Calendar:

Today
- 10:00 am Sept NAHB home market index (expected at 66 from 67, as reported 64)
Tuesday
- 8:30 am August housing starts and permits (starts 1170K, +1.3%; permits 1212K, -0.25%) August import and export prices (imports +0.4%, exports +0.2%)
Wednesday
- 7:00 am weekly MBA mortgage applications
- 10:00 am August existing home sales (5.48M +0.75%)
- 2:00 pm FOMC policy statement and FOMC forecasts
- 2:30 pm Janet Yellen press conference
Thursday
- 8:30 am weekly jobless claims (303K +19K) Sept Philadelphia Fed business index (18.0 from 18.9 in Aug)
- 9:00 am July FHFA home price index (+0.4%)
- 10:00 am August economic indicators (+0.2%)

Source: TBWS

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