Market on the Hump - 4/29/15
Happy Wednesday everyone. Traders and the Fed alike are proving my long held beliefs that they really have no idea what they're doing in many instances, as rates have moved up over the past week in spite of some very poor economic reports.
Consumer confidence is in the tank, the GDP was riding the strugglebus throughout Q1 of this year (no surprise there, as everyone outside of Florida & California seems to just recently be thawing out). Housing starts aren't helping inventory (again...winter wouldn't have allowed a huge jump in that number even if builders were champing at the bit to get building en masse), and though pending sales numbers are looking good, how long can that really be sustained with a limited inventory?
So despite all of that news that usually causes nice improvements in mortgage rates, rates are up. Some improvement in European markets has been the cause most easily pointed to, but all in all, it looks like little more than uncertainty to me. Each time the 30 year fixed has attempted to settle in the area of 3.625%, we've seen a bounce higher to the nearly 4% mark, before another decline. The past couple of weeks have been no different.
As soon as the Fed statement was released today, mortgage bonds regained nearly all of their earlier losses on the day, and for good reason. The Fed appears to know it needs to raise rates sooner than later (they can't just keep talking about it, or eventually the markets are going to act on calling their bluff), but is in a tough spot. They believe the market is better than the numbers show - they believe inflation "is realistically" approaching a 2% target. They believe the GDP "is realistically" in the 2-3% range. What's funny to me, is that they want to look beyond the numbers when it suits them. They fail to look "realistically" at the employment situation, which remains stagnant despite a lowered official unemployment rate. Government officials using numbers to their benefit when possible, and ignoring them when they don't support their cause? That's pretty much what we're looking at.
It'll be interesting to see if the DOW can remain above the 18,000 mark over the next week. It's been flirting with it for weeks now, and much like when it approached 17,000, took a while to break through. I don't believe a stock rally is sustainable long term, but if it pushes through 18,000 convincingly, that won't be good for mortgage bonds.
So far as the direction for rates, like everyone else, I think they're heading up long-term. Unlike everyone else, I think it'll take longer than anticipated. The economy is still fragile enough that any major change that derails the housing recovery will have a major ripple effect. Since the US has never before seen some of the recent economic measures taken to avoid disaster, one of my questions going in (back when the bailout was just being considered) was "if we go that route, what's the possible exit strategy?". It looks like that is still an unresolved issue that they're now trying to work on, since it seems they'd like the exit to be near.
If you've got a loan in process, it's likely your rate is still below 4%, aka near the all time historic low. Lock it in & be happy. I don't think there's tremendous risk in floating rates short term, but the risk still outweighs the possible reward of a lower rate, especially since once again that 3.5% 30 year fixed rate is proving to be quite a white whale.
We'll see what the rest of the week holds, especially since there's more economic news to come. If that news is less than stellar, we should see the market make some gains and rates should see some improvements. If the economic news is stellar, we could see further pricing deterioration.
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