Good Morning on this Fantastic Thursday, August 1st,
Great commentary from Dan Rawitch:
Bonds are up VERY strongly this morning with the 10 year back below 2%. It is clear that, as usual, bonds were smarter and less emotional than stocks, as they had lower Fed expectations. On top of this, we got some discouraging news on the economy which has really lifted bonds. Construction Spending and ISM manufacturing both missed expectations, with the ISM number being the lowest we have seen in three years. OK Mr .Powell, here is more data you are dependent on. While we did break through some considerable resistance today, we are now pushing against what could be an even stronger wall.
I am going to see how the day progresses. If bonds hold on to the current gains and we see some price improvement, I will likely lock as tomorrow can be very volatile with the Jobs report. There is more to lose than to gain.
I wanted to also share a little commentary on yesterday’s Fed rate reduction as it is on point (although maybe a little less so now that rate have improved this a.m.). It is really good perspective:.
No, The Fed Didn’t Cut Mortgage Rates!
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Jul 31 2019, 6:27PM
Mortgage rates were mostly unchanged today, which will come as a surprise to scores of consumers who mistakenly believe the Fed’s 0.25% rate cut equates to a 0.25% drop in rates. The Fed does not set mortgage rates!
Actually, to be fair, the Fed Funds Rate (that thing everyone is talking about today) is in fact the basis for Home Equity Lines of Credit (HELOCs) in many cases, but that’s it as far as the mortgage world is concerned. The most common mortgages are determined by other parts of the financial market.
In fact, mortgages actually “turn into” securities that are traded in financial markets as a part of the process that makes them safer and easier for investors to buy. Those securities trade just like other securities, for the most part (e.g. stocks, bonds, etc.), and it’s the price movement of those securities that most directly dictates mortgage rates. Shockingly enough, these are known as Mortgage-Backed Securities (MBS).
Unlike the Fed Funds Rate, which only changes once every 6 weeks, if at all, MBS can change every minute of every business day. They’ve been doing just that for months as market anticipation for the Fed rate cut has increased. Simply put, the Fed rate cut has long since had its impact on the financial market and today merely saw a very small epilogue to that bigger story.
If you want to think about this in terms of the stock market, just consider that stocks LOST ground today. Why would they do that if a Fed rate cut is universally considered to be positive for stocks? Here again, stocks have already had plenty of time to PRICE-IN the rate cut. That left today for them to react to other information from the Fed. Specifically, they were a bit disappointed that Powell didn’t do more to offer assurances about additional cuts.
The bottom line is that when financial instruments (like stocks, bonds, and MBS) can move all day every day, it would be foolish of them NOT to move in anticipation of something that will almost certainly happen. That was the case with today’s Fed rate cut. In fact, they have already accounted for at least one more cut.
That means, all other things being equal, if the Fed were to say “we’re done cutting for now and will keep rates at these levels for the next 6 months,” you’d see an immediate and rather large move higher in rates. In other words, we’re already counting on another 1-2 Fed rate cuts simply to sustain the low rates that are already here. If those cuts don’t come, rates will move back up.
Make today great!