Wednesday, December 2, 2015 - Article by: Bart Castelli - Homestar Financial Corporation NMLS #70864 -
Coming off their best day in over a month, mortgage rates held mostly steady today. This is somewhat of an accomplishment considering the movement seen in underlying bond markets. Specifically, bond markets suggested a bigger move higher in rates today, based on the typical level of correlation.
Janet Yellen in her speech at the Washington Economics Club this afternoon painted a nice picture. In her view (the Fed's view) she is confident in the outlook for economic growth and that if the Fed were to wait too long before beginning to come off zero it might in the future cause the Fed to have to react more aggressively and disrupt markets in a way that a gradual increase in rates would do. She also said almost all Fed officials have been saying, that inflation will move to 2.0% in the medium term. Need a dictionary? Medium term in her definition is 2017. Most of her comments were repeats from what she has said at various other speeches and testimony. Tomorrow she is scheduled to testify to the Joint Economic Committee in Congress, but who is really expecting to hear anything new from her.
The increase in ADPs report today and the increase in October kind of cement that the BLS report on Friday will be good enough to allow the Fed to make its 0-.25% increase when the FOMC meets on December 16th, but I am hoping that my prediction was right that I made in March, but it is not looking good at the moment.
Tomorrow one more bridge to cross for the Fed (beside the employment report), the November ISM services sector index. Unless the index drops below 50, and it should not, it will be taken as a plus for the Fed. Also tomorrow October factory orders are expected to be up after declining in September. The ECB will meet tomorrow, should get streaming info about 8:00 am. The view is that Mario Draghi will add more stimulus as he said after the last meeting. Once again, like our bond markets a lot of the anticipated stimulus has already been discounted in present levels.
In summary, I have been floating recently, the 10yr broke its resistance at 2.20%, now a support level and it held today in the back up of rates and lower prices. Price action is somewhat suspect now with so much to deal with in the next two sessions but so far the near term looks good. I however do not want to be long, but I am taking a little bit of a gamble here. The risk is high while the reward is questionable. If our models are correct a rally should ensue but presently it is prudent to stand off and let the markets react. It would not be the first time the work flipped, and likely it will not be the last time either.
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