Rates remain unchanged pending FOMC meeting

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Published Date 2/21/2018

Interest rates remain unchanged in early activity so far today. Today all attention is directed toward the Federal Open Market Committee (FOMC) minutes from the January meeting. Markets anxious to find out what took place at the meeting left rates unchanged and are looking at the prospect of more rate increases. Comments about the Fed’s economic outlook and inflation are the key to markets now. Higher rates will cost businesses that borrow to fund operations. The present belief floating is three increases this year but there is also increasing chatter that the Fed may have to go four times to keep from getting behind the curve fighting inflation. The minutes will be released at 2:00 PM ET this afternoon.

Is inflation really going to increase and move above the Fed’s and ECB 2.0% target so long in coming? Until the last couple of months the Fed and ECB have found inflation projections elusive. With the tax cuts the overwhelming belief now is economic growth will exceed 3.0% and possibly 4.0% in 2018 and 2019. Interest rates across the curve have been increasing since the beginning of the year in anticipation of inflation increasing and the Fed is poised to act most likely at the March meeting.

Early this morning the results in mortgage apps on higher mortgage rates were evident in the weekly MBA applications; down 6.6% overall, purchase apps -6.0% and re-finance apps -7.0%. Re-finances accounted for just 44% of applications, down from highs a year ago at 60+%. The prior week apps declined 4.1%. The purchase apps were at 3.0% yr/yr, down 1.0% from the prior week.

Yesterday the Treasury sold $28B of 2-yr and demand was tepid. Today at 1:00 pm EST Treasury will auction $35B of 5-yr. The demand is important as one measure of evaluating the market's appetite for more supply. Yesterday the 2 wasn’t encouraging.

At 9:30 am EST the DJIA opened +61 after trading lower in pre-open futures markets, NASDAQ +35, S&P +7. 10 yr at 9:30 2.88% unchanged from yesterday.

At 10:00 January existing home sales were expected at 5650K from 5570K in Dec. Sales dropped to 5380K -3.2% and -4.8% yr/yr, the lowest since August 2015. The median sales price of $240,500 was up 5.8%. Last month sales were down 3.6% and yr/yr, in December +1.1%. December sales were revised lower, from 5570K to 5560K. The softer sales did not have any impact on the 10-yr or MBS prices but the weak report won’t get buried in the overall economic performance; today it’s the FOMC.

Look for the $35B 5-yr note auction at 1:00 pm.

Look for the FOMC minutes at 2:00 pm.

We don’t expect much movement in the bond and mortgage markets until the FOMC minutes this afternoon, depending how markets divine the comments and text.

Pending the FOMC minutes this afternoon, our work is suggesting the possibility for some improvement in rates. If it occurs, however, it will not change the wider bearish outlook for US and global interest rates increasing. The 10-yr has resistance at 2.85%, 2.80%. We are looking for a slight improvement based primarily on how high rates have gone in a short time frame. Otherwise all signs remain negative and the 10-yr is set to test 3.0% in US trading.

Source: TBWS

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