What Happened Last Week?
Mortgage backed securities (MBS) gained 67 basis points (BPS) from Wednesday’s close which caused fixed mortgage rates to improve.
It’s Fed-O-Rama…can you feel it? The bulk of long bond traders wanted a rate hike but expected them to wait and that is what we got but the reasoning behind waiting was the shocker.
Okay…now that you have read all of that, let’s dive right in.
What the Fed said: They left their key interest rate UNCHANGED and the FOMC vote was 9-1 with only Lacker dissenting. Overall a very dovish statement.
Here are some highlights:
In the July statement, the word “global” was not used once but now “global” weakness is cited as the primary reason for the Fed to wait.
On the domestic front, it would appear that the economy is trending in the right direction with only the absence of inflation making a case for a rate hike.
-Said economic activity expanding at a moderate pace.
-Said household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year.
-Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.
Now comes the release of their economic projections. When you compare September to June (the last time this was released) the projections for GDP, PCE, Unemployment and Rate Hikes are fairly similar but have been reduced slightly.
Here are the main points:
– 13 out of 17 Fed policy makers still project/predict at least one rate hike in 2015, that is down from 15 out of 17 in July.
– 4 policy makers think rates should not be raised until 2016, compared to 2 in July.
Next up was the live press conference with Fed Chair Janet Yellen:
– She said that the path of the first rate hike is more important than the timing of it.
– She cited specifically that China was a concern which has RILED many as it puts our FOMC in the role of the Global Central Bank and since there will always be some modicum of global weakness, it would appear as if we can never ever raise rates.
– The Fed does not respond to market ups and downs.
– The Fed does not take into consideration debt ceiling limits and/or the dysfunction of Congress of not passing a budget.
– Wants to see inflation close to 2%.
What now? There are two more meetings this year in October and December. While 76% of the FOMC says that in their own personal projections, they expect a rate hike, it is very difficult to imagine one now that Yellen has effectively PEGGED OUR CENTRAL BANK POLICY TO THE WEAKNESS IN CHINA. And just about every economist out there thinks that China is just now beginning to teeter and the worse is yet to come. So…if China keeps sliding……does that mean no more rates? Literally….a zero rate is NO rate.
What’s on the Agenda for this Week?
MBS will continue to trade within the same near-term channel that they have been in since July 23. Friday’s intra-day high and close are not supported by that channel and are expected to pull back (slightly) from Friday’s close on an intra-day basis today.
This week is loaded on the back end with some very big economic reports which include the third revision to the 2nd quarter GDP and Durable Goods Orders.
09/22 – 2 year note
09/23 – 5 year note
09/24 – 7 year note
The Talking Fed
09-21 – St. Louis Fed President James Bullard, Atlanta Fed President Dennis Lockhart (the lone dissenting vote in the FOMC meeting Thursday)
09/24 – Fed Chair Janet Yellen
09/25 – Kansas City Fed President Esther George
This morning James Bullard spoke on CNBC and said there is “a chance” that the Fed could raise interest rates in October but “…the problem with going from one meeting to the next is how much information has really changed.” “I would have dissented on this decision,” added Bullard, who is not a voting member of the Fed’s policy setting committee. He also said that he wants a press conference after every Fed meeting and that “there’s a powerful case to be made that it’s time to raise interest rates. And the case is not complicated. … Policy settings are [in] an emergency. The economy itself, the goals of the committee, have essentially been met.” Even if rates go up, monetary policy will still be accommodative, he added.
Across the Pond
Greece is the word: He’ baaaaack. Alexis Tsipras is returning to office as Greek prime minister after a victory in the weekend’s general election. This will start all of the bailout talks again…so we have that to look forward to.
China: Just like the U.S., they have their own “Beige Book” put out by their central bank. And their beige book paints a picture of market perceptions being much worse than what’s really going on there. While the economy slowed in the third quarter, there are no signs of an impending growth collapse.
Chronology: MBS opened lower right out of the gate on three factors: (1) China’s Beige Book, (2) comments by Bullard, (3) Greek elections, and (4) technical pullback from Friday. MBS had little to no reaction to the only economic release today (Existing Home Sales) and then moved lower on comments by the Fed’s Lockhart in the afternoon.
Talking Feds: (Both today were EXTREMELY bullish in favor of higher rates this year)
At 1:00 pm EDT: Atlanta Fed President Dennis Lockhart – the lone dissenting vote in the FOMC meeting Thursday – continued to make his case. He said he was “comfortable enough” with the current and projected inflation rate to raise rates. He also said the U.S. economy is “performing solidly” and the country has met the criteria for “further improvement in the labor markets.” Ultimately, the central banker voiced his support for a hike “in one of the coming FOMC meetings.”
Existing Home Sales: The August reading was a tad lighter than market expectations (5.31M vs estimates of 5.50M), but it was easy for traders to conclude that the main culprit was a major lack of good (or any really) inventory in key markets. If it was available, it would have been snapped up before rates rise. August marked the 11th straight year-over-year gains in volume and the 42nd straight month of increases in the median price. So, while the headline number was a miss…it was a solid report and did not impact pricing.
Tomorrow will be 2 year Treasury note auction and the low-level Richmond Fed report.