Tuesday's bond market has opened in negative territory following the release of this morning's inflation data. The stock markets are posting early gains with the Dow up 70 points and the Nasdaq up 8 points. The bond market is currently down 7/32, but I am not expecting to see much of a change in this morning's mortgage rates as lenders wait for the results of today's FOMC meeting before making significant changes.
The Labor Department reported that August's Producer Price Index (PPI) fell a whopping 1.2% when it was expected to drop 0.3%. However, the core data reading rose 0.2%, exceeding forecasts of a 0.1% increase. This means that the more stable and therefore more important core data showed slightly higher levels of inflationary pressures than analysts had expected. This is considered bad news for bonds because inflation erodes the value of a bond's future fixed interest payments.
Today's FOMC meeting will adjourn at 2:15 PM ET. The general consensus is that the Fed will cut rates for the first time since June 2003. There is also debate about how much of a rate cut is coming. Many analysts are calling for a half-point decline at this meeting or a quarter point cut at the next two meetings. I am not so sure the Fed will lower the Fed Funds rate at this meeting. My estimates are only 30% chance of it happening at this meeting and only little possibility of a half point cut. But, Mr. Bernanke and friends have little interest in our thoughts. I suspect that if they leave rates unchanged, the financial markets will be disappointed and will tank. A quarter point move will also be somewhat of a disappointment and could lead to weakness in stocks.
The wildcard is that regardless of how the markets react to the Fed move and its post-meeting statement. If we see significant weakness in stocks, the bond market may benefit as a safe-haven from the volatility. This could lead to lower mortgage rates. However, that is much too speculative to bet that way with mortgage rates. There just is no way to predict am emotional response in the markets. Accordingly, I strongly recommend proceeding carefully regarding mortgage rates the next few days.
Look for an update here shortly after the markets have had an opportunity to react to the meeting's results and statement.
If I were considering financing/refinancing a home, I would.... Lock if my closing was taking place within 7 days... Lock if my closing was taking place between 8 and 20 days... Lock if my closing was taking place between 21 and 60 days... Float if my closing was taking place over 60 days from now... This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.
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