Jason Obradovich is back with another episode of the Mortgage Rundown. Jason talks about the market’s low interest rate volatility due to fiscal policy measures being at a standstill and a lackluster economy in terms of inflation, spending, and income. Will the Fed raise rates, unwind the balance sheet, or both? Watch the video and learn more about the current market and what to keep an eye on in the following weeks.
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Hello everyone and welcome to the Mortgage Rundown.
As you may have noticed, there has been very little interest rate volatility this past month. In fact for the entire month of July, the 10yr Treasury and mortgage rates only moved 1 basis point. There are two reasons as to why rates are moving very slowly. First of all fiscal policy measures, such as tax reform, health care reform and infrastructure spending have been at a standstill. Second is the lackluster performance in economic terms with regard to inflation, spending and income. All of this together has created an environment where this isn’t any confidence in future growth.
The Federal Reserve met last week to discuss monetary policy, where they left interest rates unchanged. There wasn’t any doubt that the FOMC would leave rates unchanged in July. However there are a lot of questions over whether the Fed raises rates later this year or begins to unwind the balance sheet or it might be possible that they do both. Today the market prices in another interest rate increase by year end at 38%, with that increase coming in December, if at all. There is a general belief that the Fed will begin to unwind the balance sheet in the 4th quarter, which could effectively increase longer term rates.
What’s keeping rates low is an economy growing very slowly and legislative stalemate. The Fed wants to raise rates to more normal levels as well as prevent advancing inflation in the near term. This week however the Fed’s preferred inflation measurement, the Personal Consumption Expenditures rose only 1.5% year over year, still well below the Fed’s desired 2% target.
Speaking of inflation, please take a look at the graph on your screen. This is Core PCE for the last 5 years. Note how encouraging the figure was in 2016 as it moved towards the 2% target but since that time in 2017, it is barely holding at 1.5%.
This is the big challenge for the Fed. How do they raise rates and shrink the balance sheet when inflation is trending to an uncomfortably low level? If inflation moves below 1.5%, I would expect more of a reaction from the market with rates moving lower, similar to the path seen in 2016. With inflation looking weak the only thing that could push rates higher is legislation actually passing in Washington and even that looks remote.
In the coming weeks you should keep an eye on the following items:
1. Friday brings the employment data such as non-farm payrolls and the unemployment rate
2. Next week brings inflation data, such as PPI and CPI from July as well as retail sales
3. Lastly keep an eye on legislation out of Washington as well as corporate earnings.
If you would like a more in-depth analysis, please visit our blog. You can find the link in the description. Thanks for watching and have a great day.
market trends for coffee shops Mortgage Rundown: August 3rd 2017 | |
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