Morning Report: Parsing the FOMC minutes

Vital Statistics:

	Last	Change
S&P futures	4,293	-57.8
Oil (WTI)	71.41	-0.85
10 year government bond yield		1.29%
30 year fixed rate mortgage		3.11%

Stocks are lower as investors lose their confidence in the reflation trade. Bonds and MBS are up.

Mortgage backed securities are lagging the move in bond yields, as usual. This means that mortgage rates are not going to correlate perfectly with the decline in the 10-year. It may take a day or two for MBS to catch up.

Initial Jobless Claims were more or less unchanged last week at 373,000. The number came in above expectations.

The FOMC minutes from June didn’t really say much, although the Fed is at least greasing the skids for tapering:

“Participants discussed the Federal Reserve’s asset purchases and progress toward the Committee’s goals since last December when the Committee adopted its guidance for asset purchases. The Committee’s standard of
“substantial further progress” was generally seen as not having yet been met, though participants expected progress to continue. Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of incoming data. Some participants saw the incoming data as providing a less clear signal about the underlying economic momentum and judged that the Committee would have information in coming months to make a better assessment of the path of the labor market and inflation. As a result, several of these participants emphasized that the Committee should be patient in assessing progress toward its goals and in announcing changes to its plans for asset purchases. Participants generally judged that, as a matter of prudent planning, it was important to be well positioned to reduce the pace of asset purchases, if appropriate, in response to unexpected economic developments, including faster-than anticipated progress toward the Committee’s goals or the emergence of risks that could impede the attainment of the Committee’s goals.”

The FOMC also discussed reducing the purchases of mortgage backed securities earlier than expected “in light of valuation pressures in the housing market.” While lower mortgage rates probably are helping support asset prices the fundamental issue is a supply shortage, not mortgage rates.

The stance of the FOMC on reducing MBS purchases will make mortgage rates move down more slowly than otherwise. Ultimately, the reduction will depend on inflation and the labor market. The Fed will be comfortable with inflation above the 2% target, and the commodity-push inflation is probably going to ease. The labor market is the bigger question, and so far it is providing such mixed signals that I don’t see the Fed adjusting policy in response to it. That said, expect disappointment when you run a scenario after hearing on CNBC that Treasury yields are down another handful of basis points.

On the labor market, the Fed expects the current labor supply constraints to ease. It believes that the current issue of unfilled jobs is a due to a combination of “early retirements, concerns about the virus, childcare responsibilities, and expanded unemployment insurance benefits.”