Markets on edge waiting for today's Fed decision

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Published Date 12/19/2018

At 9 am EST the 10 yr note was at 2.81% and MBS prices continued to improve.

Weekly MBA mortgage applications continued to fall after an improvement the prior week; overall apps are down -5.8%, purchase apps lost -7.0% and refinance apps fell -2.0%. The decline took the year-on-year gain in unadjusted purchase applications down 2 percentage points to 2 percent and increased the refinance share of mortgage activity by 2 percentage points to 43.5 percent, its highest share since February.

Unless you were in a coma recently you have been subjected to debates rolling through the financial markets over whether the Fed will, or should, increase rates this afternoon. The overwhelming belief this morning is that the Fed will increase the Federal Fund rate by 0.25% this afternoon. There're good reasons for the Fed to hold off — no inflation, trade uncertainties, slowing US and global growth, 2019 forecasts from every corner, and experts calling for the global economy to slow. That includes the ECB, the Fed, the IMF, and many Wall Street banks. What propels the view for the increase this afternoon is that markets are expecting it. That’s it. The Fed doesn’t ever want to surprise markets.

It’s not the rate increase that investors are focusing on, however. It’s the policy statement and what the FOMC frames in its future. Jerome Powell’s press conference will put him squarely on the hot seat defending the Fed’s track record (which is deplorable) and the Fed’s view of the future. The Fed will also release its quarterly forecasts.

At 9:30 am the DJIA opened up +36, the NASDAQ was down -3, and the S&P added +2. The 10-yr was down -1 bp at 2.81.

On the trade front with China, Sec of Treasury Mnuchin said the US and China are planning trade talks. China’s economy is worsening at a more rapid rate than was expected just two months ago; the US is facing a slowdown, incentives for both countries to increase efforts to work out a trade policy that at the end of the day won’t get either country what they want, but will be better than where trade disparities are now.

It should be relatively quiet until 2:00 pm ET when the FOMC releases its policy statement and confirms the rate increase that is the consensus. Not unusual that the policy statement ignites momentary volatility as a new consensus is formed. Takes a few minutes for everyone to get on the same page.

Source: TBWS

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