Good Thursday PM,
Easy to write some notes late in the day when you already know the outcome. Bonds started off stronger and slipped a bit into the closing. Stocks also down on the day. There was some stronger data this a.m. but the real story is that traders and markets are still digesting what Mr. Powell didn’t say yesterday when the Fed cut rates .25%. He threaded the needle masterfully well; didn’t show his cards and didn’t upset anyone.
I don’t think there is much risk in either direction at this point. My gut feeling is to float but rates are still incredibly low and the smart choice is to lock when you see a rate you like.
Make the rest of the day great!
Good Morning on this Wednesday AM and best day of the week,
Today is Fed-Day… that is going to drive markets until 11 a.m. or so. Stocks are off a bit, bonds are up a bit but no changes in pricing yet. The Fed announcement at 11:15 or so and then Mr. Powell giving a speech on his outlook. Mr. Powell has a knack for upsetting the markets when he speaks. Expect big movement today and likely in both directions as the markets digests his comments.
Bonds opened with a nice gap up and are holding those gains despite Housing starts and building permits beating expectations. The housing start number grew 12.4% over last month. The small improvement in bonds today is likely related to Fed Ex and other companies reporting weak earnings. Also, major US business leaders, during a round table, have downgraded their estimates on the US economy for the year. Most citing global concerns and trade war uncertainty.
I’m betting on a 0-25 bp reduction in rate and a selloff in stocks. If stocks dive, bonds will rally.
One mortgage pundit shared the below scenarios. I don’t think there is any chance of a 50bps reduction, and there are several other possible outcomes but, it is worth the read just for flavor.
IF THE FED CUTS RATES .250 BUT DOESN’T LEAVE THE DOOR OPEN (30% likely)
OK, if the Fed cuts rates by a quarter-point, but any combination of the statement, dot plot, and Powell’s comments don’t give markets the warm, fuzzy dovish feeling of further rate cuts to come, we will see some positive reaction but it will be muted. Meaning we will see bonds hold steady and improve some, but not enough to get really excited about. Remember though, the Fed doesn’t have to do or say much, investors will grasp at straws and run with it.
IF THE FED CUTS RATES .250 AND SIGNALS FURTHER RATE CUTS (OR AT LEAST MARKETS THINK MORE CUTS ARE LIKELY) (45% likely)
Many would argue that current economic data doesn’t justify a Fed rate cut this month, let alone more cuts to come. But the reality is that if you look closely at the data, it’s not as good as it looks. The economy is in trouble, and is only being kept alive by consumer spending (which is actually being supported by consumer borrowing). The Fed has to try and act before it’s needed, because their actions have a delayed effect. If the Fed cuts rates by a quarter-point and makes it known that more cuts are likely, and markets are secure in the idea that more accommodation is coming, we’ll likely see bonds improve today and through the rest of the week, and we should recover at least half of what we lost recently. But if markets are left to simply speculate more cuts to come because the Fed just leaves the door open a bit, we’ll see less improvement.
IF THE FED CUTS RATES .500, AND LEAVES THE DOOR OPEN FOR MORE CUTS OR SIGNALS MORE CUTS (5% chance of this happening)
This would be party time for pricing… think old comedian Sindbad, “Paaaaaaaaaaaarty. We would definitely see rates drop again, and rather quickly.
IF THE FED LEAVES RATES WHERE THEY ARE, REGARDLESS OF SIGNALS FUTURE CUTS POSSIBLE (20% chance here)
This would be bad, really bad. It would probably signal that we are going to see rates spike again by at least another .250 in RATE.
So, the advice is of course to float into the day, be ready at 2 p.m. ET, and don’t stop watching till the end of day.
We will know soon.
Make today great!
Good Morning on this Terrific Tuesday,
Bonds are looking to post a second day in a row of gains but please don’t get too excited. The 10-yr is back to 1.80% and that’s the same rate called a week ago that we would head into the Fed meeting with. Bonds should be improving more but there is little chance to see much more from this today Data today was stronger than expected and markets are now less confident that the Fed will cut .25 tomorrow. I think it is likely (no longer highly likely) that the Fed cuts tomorrow. The devil will be in the details of the press release and Fed speech. I can make the argument that whether the Fed cuts or not, bonds have a better then 50/50 chance of improving. If the Fed decision is to cut, with the recent spate of strong economic data, the Fed is likely to say that is it for a while. Intuitively that would be bad for bonds, and yes it would be, but likely even worse for stocks. If stocks tank, money will flow to bonds and drive rates lower. In another scenario, if the Fed doesn’t cut and the commentary is wait and see, it hurts bonds but stocks tank and bonds end up improving. If the Fed does cut and confirms future cuts, that may actually hurt bonds as although that news is bond friendly, however, more friendly for stocks and the risk on trade wins (money flowing into equities). Lots of circular logic here and I welcome any input you want to share.
If the 10-yr does crack 1.79%, the same run down will hold as we saw the run up. It opens the channel to make a run down to 1.60%
Customer piece of mind: Mortgage rates are still lowest since November 2016.
Make today great!
Good Monday A.M., I hope you had a fantastic weekend,
Dan Rawitch hit this one out of the park with not only accuracy but also with brevity. A skill set I continue to work on.
Bonds are finally getting a break and the DOW is finally taking a break! The bombing of Arabian Oil fields is causing a bit of a “risk off” mentality this morning. Oil spiked more last night on a percentage basis than ever before. Gold and Silver are up nicely too, which is another indicator of fear in the markets. The news will lead you to believe that the DOW is down because of the spike in oil prices, which is feared to hurt the global economy. I agree with this, but equal if not more, wait on the uncertainty of war and what might this all mean. Markets dislike uncertainty and for now, it has flipped off the risk switch. Bonds held perfectly at the Fibonacci 63.8 line which is a good sign. The bounce could get meaningful if the equity markets fall more today. All of this may not matter come Wednesday. The language that the FED uses when discussing his rate decision will likely cause big movement!
Here is the cheat sheet for the above:
The 10yr is currently at 1.84 after spiking to 1.90 on Friday.
Mortgage backed securities are +12bps and flirting with +20
Fibonacci was an Italian mathematician from 1200, lived in Pisa, and developed an order to mathematical sequences which still apply today. There has been a 63.8% retracement of the bond improvement which is a Fibonacci sequence. He also spread the use of our current Arabic numerals to replace Roman numeral which were used during that same time period.
Fed meeting is Wednesday, stay alert.
Make today great!
Good Friday AM,
The best thing about it so far Is we will get to lick our wounds and rest up for the weekend. This has been a rough week in the mortgage
Dan Rawitch’s commentary is on point and worth sharing. Ouch, the hits keep coming. Retail Sales WITH TRANSPORTATON INCLUDED, rose more than expected. However, it is ridiculous for the media and traders to focus on this number. The number that matters is Retail Sales Ex-transportation and they were way below expectations. In fact, they were unchanged from last month and last month was horrible. We cannot look at the headline retail sales number because auto sales skew that number. It is good that auto sales jumped, but they jumped because of near record low interest rates. Also, we have an index that tracks auto sales separately. On top of a bad retail sales number, import AND export prices fell hard, thus helping the FED with their decision to lower rates. It is interesting that both import and export prices fell, given the Tariffs. I suppose the big Tariff increases have not hit those numbers yet. The market is way oversold now. It is common after a big run up in prices for things to swing too far the other way. We went from way overbought which created a mini bond bubble and now we are way oversold. It is tough to say if we have found bottom as we continue to cut through each level of support like a knife thru warm butter. The other major culprit here is our zombie crack induced stock market which is not up for the 8th day in a row. Did I mention I was short the S&P and the VIX? I am keeping those short positions open because I know this will correct. When stocks correct, we will move back to a “risk off” mentality and bond prices will rebound. I mentioned yesterday that I thought 101.50 was the top of the range and locking was thing to do. I was right about 101.50 being the temporary top, but wrong in that we did hold 101.20. We still struggle to find a bottom.
A formal and full trade deal still looks unlikely but markets are definitely appreciating there seems to be a temporary softening of both sides. China will buy US soybeans again.
I wish it was better. Right now in the rate markets, it is all about getting out of the way and waiting for the sun to come out.. which it will, it just may not be tomorrow.
Enjoy the weekend and make today great!