Tuesday, November 02, 2010
Nothing on the calendar today, no economic releases and the FOMC meeting starts. Election day, later this evening markets will have one issue resolved; whether Republicans gain the Senate or not. The House is being conceded to Republicans, voters upset over the debt, the lack of job growth, health care, and financial regs that have not saved consumers a dime. Actually the regs passed by Sen. Dodd and Barney Frank have increased the cost of acquiring a mortgage by $400.00 just to mention one of the negative impacts coming from the financial reform regs.
All attention now is on the Fed and how we get more stimulus, and most importantly will interest rates decline? Based on the way rate markets are trading over the past two weeks the present view is interest rates won’t fall much if at all. The majority are expecting a $500B purchase of US treasuries over a six month timeframe and yet interest rates are increasing. The missing element in the debate is that recent economic data has overall been slightly better than economists’ forecasts. With the Fed printing money for the easing move and possibly better economic outlook it is a formula for potential inflation, it is what the Fed is aiming for with the easing. From the markets perspective, if the economic outlook improves while the Fed is adding more to its balance sheet with the easing move that is expected, it is not likely interest rates will decline much.
Although a slightly more improved economic outlook; it is a very tenuous belief. Unemployment is high and even the most bullish concede jobs won’t improve through next year with the unemployment rate remaining over 9.0% for most of the year. The housing sector is not rebounding, even with historic low rates as long as valuations continue to decline there is no motivation to rush to purchase; consumers still deleveraging. The Fed wants inflation levels to increase to the 2.0%/2.5% level from 1.0% presently; the Fed won’t be unhappy if the dollar continues to decline as a response to more money printing. The Fed isn’t as concerned about the level of interest rates as much as bumping up inflation, and inflation increases are anathema to the long end of the yield curve and mortgage rates.
The mortgage markets are opening better this morning after strong selling yesterday. Treasuries a little better and the stock market opened higher. Should be generally quiet today with no data points, the election and tomorrow’s announcement from the Fed on the QE move. Yesterday we were expecting a flat day but the rate markets were anything but flat, rates increased; especially mortgage rates that face the hurdle of all the foreclosure problems that are keeping MBS investors away.