Mortgage bond prices are positive this morning helping to bounce back a bit from the steep selloff yesterday.
Traders will position themselves ahead of the Fed results tomorrow afternoon. Many believe the Fed will announce continued quantitative easing. Quantitative easing is tool used by the Fed to increase the supply of money by increasing the excess reserves of the banking system. The Fed basically creates money out of nothing, crediting it’s own accounts, then uses those funds to purchase financial assets usually including government bonds and mortgage backeds securities from financial institutions.
The rest of the week looks to be interesting. We have a Fed meeting, productivity data, and the employment report all in a single week. This is not your typical week with the significant data and elections all hitting us at once. There is more potential for wild market swings, as was evident this afternoon with the terrible slide in prices pushing rates higher.
The Fed meeting this week will be the most important release. While no rate change is expected the wording of the statement will be carefully scrutinized.
LOOKING AHEAD 11.01 to 11.05
Date & Time
|Personal Income and Outlays||Monday, Nov. 1,
8:30 am, et
|Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.|
|PCE Core Inflation||Monday, Nov. 1,
8:30 am, et
|Up 0.1%||Important. A measure of price increases for all domestic personal consumption. Weakness may help rates.|
|ISM Index||Monday, Nov. 1,
10:00 am, et
|53.6||Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates.|
|ADP Employment||Wednesday, Nov. 3,
8:30 am, et
|25k||Important. An indication of employment. Weakness may bring lower rates.|
|Factory Orders||Wednesday, Nov. 3,
10:00 am, et
|Up 0.6%||Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.|
|Fed Meeting Adjourns||Wednesday, Nov. 3,
2:15 pm, et
|No rate change||Important. Few expect the Fed to raise rates, but some volatility may surround the adjournment of this meeting.|
|Preliminary Q3 Productivity||Thursday, Nov. 4,
8:30 am, et
|Up 0.6%||Important. A measure of output per hour. Improvement may lead to lower mortgage rates.|
|Employment||Friday, Nov. 5,
8:30 am, et
|Very important. An increase in unemployment or weakness in payrolls may bring lower rates.|
Why Data is Important
One of the easiest and most important things to do when making a decision whether to float or lock a loan is knowing what data is going to be released. Economic releases are important because they provide a snapshot of a portion of the economy. Data is even more important in that it is often the cause of market volatility. Upcoming data events are readily available and there is no excuse not knowing what data will be released in the week ahead.
While an in depth understanding of an economic event can help a person make informed decisions, it is more important to have a rudimentary understanding of when an important piece of data will be released and what basic effect that data can have on the market. Understanding the nuances of a release does very little for a person if they are blindsided by not knowing when the release will occur. Accurately predicting how each and every release will come in is impossible.
Floating into important economic data can be very risky and can expose a person to huge market swings. Keep that in mind this week, as there is an abundance of significant data heading our way. The combo of a Fed meeting and the employment report in the same week is not common.
Mortgage bond prices closed slightly higher Friday afternoon applying downward pressure to mortgage rates.
In news released at the open, Q3 advanced gross domestic product rose 2.0%. That data was as expected. The only way we will ever recover from the Great Recession is to have GDP continue to increase. However that said, as GDP increases so will rates because an expanding economy can be inflationary.
In other news, the employment cost index rose 0.4%. Traders were expecting ECI to rise 0.5%. Lastly, consumer confidence stood at 67.7K vs. the expected 68.00 analysts had estimated. All in all the data was as expected.
Next week is going to rock and roll. Monday brings income, outlays, core PCE and IMS data, the election on Tuesday, Fed meeting Wednesday and the employment report Friday. Yikes!
On Tuesday August 10, 2010, 10:29 am EDT
Following some downbeat comments from the San Francisco Federal Reserve, there are expectations that the Federal Open Market Committee could move for more easing when it meets Tuesday.
“There is huge pressure on (Federal Reserve Chairman) Ben Bernanke to do something,” said Mark O’ullivan, a director Currencies Direct.
While the target fed funds rate is effectively zero, the central bank could try quantitative easing (QE), where it increases the money supply by means other than rates, such as buying government bonds.
“The Fed is not yet in panic mode, but the market simply does not know if we will get more QE or direct purchasing of Treasurys,” O’Sullivan said.
With volumes low over the summer, bets against the dollar are at a yearly high and this could lead to a short squeeze, where prices rise rapidly as investors try to cover short positions on the greenback, O’Sullivan said.
“If the (European Central Bank) and (Bank of England) follow the Fed’s lead, any move on QE could be dollar positive,” he said. “Even if the Fed spooks the market the dollar could gain on a flight to safety.”
President Barack “Obama has been very vocal on austerity measures in the (European Union) and UK, but there is a chance of short-term decoupling,” O’Sullivan said.
Fed’s Hand Will Be Forced
David Blanchflower, a former member of the Bank of England’ monetary policy committee who now teaches at Dartmouth College, said he believes the Fed will be forced to move either today or next month.
“The US economy in particular is not steaming into action on the jobs front,” Blanchflower said. “That’s really affecting people’s confidence. And it’s not clear we actually are on the right track and I think that the Fed, if not this month … will probably do something in September.”
“The worry is that growth is anaemic and we could be pushed back into double dip,” Blanchflower said.
And the UK will not be able to avoid following the Fed’s lead, he said.
“The problem in the UK is that this new government’s come in and doesn’t seem to have much of a clue about economics,” Blanchflower said. “It’s made a set of announcements about what it was going to do but didn’t really understand where the economy was.”
“On Friday the (Organization for Economic Cooperation and Development) talked about the UK economy being in double dip, moving into, if you like, a peak, a slowing,” he said. “The problem is if it’s slowing and you decide to cut fiscal policy like mad, you cut spending and raise taxes then really that puts huge strain on monetary policy.”
“Interest rates are sitting at zero essentially, so what’s plan B? The only plan you’ve got is more QE, and the pressure on the UK to do it will be huge.” Blanchflower said.
The Higher-Rate Camp
Sir John Gieve, deputy governor and the person in charge of financial stability at the BoE when the financial crisis hit, said both the US and Europe will avoid another recession and that he thinks it will not be long before higher rates are being discussed.
“We wont actually see a double dip in the US or Europe,” Gieve said. “By the end of this year, the beginning of next, well have seen another two quarters of not very interesting but still proper growth.”
“At that point I expect the European authorities to start saying that ‘if we’ve had four quarters of growth do we need emergency levels of interest rates?’” Gieve said.
“The BoE has an inflation target so the BoE would be within its rights if there is a case for raising rates,” John Wraith, a fixed-income strategist at BofA Merrill Lynch Global Research, said. “The Fed’s remit is less clear.”
“We do, though, have some concerns about Europe,” Wraith said. “What goes around comes around and euro-zone growth is being driven by German exports. A higher euro and weaker demand from the US would be bad for German exports.