Vital Statistics:
| Last | Change | |
| S&P futures | 3317 | -66.6 |
| Oil (WTI) | 39.83 | 0.46 |
| 10 year government bond yield | 0.65% | |
| 30 year fixed rate mortgage | 2.94% |
Stocks are lower this morning on overseas weakness. Bonds and MBS are up.
The Fed maintained rates at current levels yesterday. There were no major changes in the predicted path of interest rates, although the dot plot introduced the 2023 forecast, which shows predicts rates staying at 0%. The language in the statement shifted slightly however:
The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
The statement about inflation being “on track to moderately exceed 2 percent for some time” reflects the new thinking at the Fed that it will target an average rate of inflation. Since inflation has been well below the Fed’s target rate, in order to get the average to 2%, it will have to permit higher inflation for a while. The other thing to note is that the current levels of QE (MBS and Treasury purchases) should be considered a floor for the time being.
The economic projections were tweaked slightly, with 2020 GDP growth boosted from -6.5% to -3.7%. That said, 2021 and 2022 GDP growth rates were cut by 50 basis points each year. The expected unemployment rate was cut to 7.6% from 9.3%. Finally, the dot plot shows the Fed expects to maintain a 0% Fed funds rate through 2023.
The part about Treasuries and MBS should be noted as well. Right now, mortgage rates are being pushed upward by the sheer amount of hedging supply in the TBA market. In other words, when a borrower locks a rate, the mortgage bank will sell a mortgage backed security to hedge that lock. That selling puts downward pressure on TBA prices, which puts upward pressure on rates (remember bond prices and interest rates move in opposite directions). On the other side of the coin, we have the Fed buying TBAs in an effort to push mortgage rates down. At the moment, it seems like we kind of have a balanced market, since mortgage rates are pretty stable. As we head into the seasonally slow period selling pressure will dry up, at least a little. But the Fed isn’t going to take the foot off the gas. It just told you it won’t. I wouldn’t be surprised to see the Fed’s buying pressure become the dominant force in the MBS market this fall and winter. What does that mean? Mortgage rates will continue to ratchet lower, even if the 10 year bond goes nowhere. Why? mortgage spreads will tighten.
Housing starts fell to 1.41 million last month, which was a bit below expectations. Declines in multi-fam were offset by increases in single family residences. Building permits were more or less flat.
Initial Jobless Claims came in at 860k last week. It sounds like the recording of claims was somewhat backed up, which means we are getting claims from a few weeks ago.
The Daily Tearsheet 