Rate Watch for the Beginning of the Year

First of all, Happy New Year! I hope everyone had a safe, fun time with family. Now, onto this week’s calendar of economic events.

In the News

Tuesday

• Job Openings / Job Quits

Wednesday

• ADP employment report
• FED minutes release from the December 15^th meeting

Thursday

• Initial and continuing jobless claims

Friday

• Unemployment numbers

We get a lot of jobs/employment data this week along with the Fed’s minutes. The jobs reports will give us insight to the strength of the economy’s recovery. However, we must remember that the unemployment numbers only involve those actively looking for work. Those who have stopped looking, and are unemployed, are not considered unemployed based on the government’s definition of unemployment. Similar tactics to the government’s inflation numbers calculations…

We may get a look at what the Fed is planning on doing with regards to tapering. Tapering is the act of the Fed scaling back their monthly bond purchases. The Fed is one of the top purchasers of US debt and when they scale back these purchases, the demand for bonds will decrease. When the demand decreases, the price of the bonds will decrease. This drop in price will cause an increase in rates, including mortgage interest rates.

Long term, my view has not changed. The Fed has any choice but to print money (which means higher inflation). They will play around with tapering and an interest rate hike or two only to have ammunition later on to decrease rates. I personally think when they increase rates, a plethora of companies will default on their debts (when due) and then we will see the Fed take a page out of Japan’s playbook and increase their corporate bond purchases.

As I’ve said before, the fed is stuck between a rock and a hard place. But one thing’s for sure: we can always count on the money printer staying on.

Chart Check

As mentioned last week, we are still within range of our wedge and I do expect a breakout to occur. If we allow the technical to play out (barring any wild external economic force to suggest otherwise), this is a bullish pattern and statistically we should see mortgage-backed securities eventually break out to the upside allowing us some short-term relief in rates. As we know, we are in unprecedented times where anything (covid, omicron, supply chains, foreign policy/tensions, etc.) can occur. Traditionally when a panic event occurs, investors rush to cash causing everything to fall (think March 2020). Then they reenter in risk-off assets such as bonds. That, plus the Fed pumping their monthly bond-buying, was why rates were so low from summer to winter of 2020.

Having said all of this, we may have a slight increase in rates tomorrow/this week (I’m writing this on Sunday evening) as investors who sold last week to take advantage of selling their losses for tax purposes, reenter the market. January is historically a bullish month for equities/stocks, so it will be interesting to see if we see the same things play out this year.