Wednesday, January 27, 2016 - Article by: Bart Castelli - Homestar Financial Corporation NMLS #70864 -
Mortgage rates pulled off a come-from-behind victory following today's Fed Announcement. This time around, the Fed was not at all likely to make any changes to the Fed Funds rate, but investors were still curious to see how the Fed worded the statement in light of January's market turmoil. As far as Fed statements go, today's ended up being noticeably gloomier and markets reacted accordingly. Stocks and rates both fell in the afternoon.
The Fed still believes consumer spending is increasing and businesses continue to increase investments. Some excerpts - The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of the further declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.
Using the worn terms of "moderate' and 'transitory' gives the Fed a very wide avenue to mis-judge. No definition to those worn out words. Markets left with debating what the Fed will do with interest rates in the future. No matter how they spin it, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
Earlier this afternoon Treasury auctioned $35B in 5yr notes, the demand was less than what recent auctions have been.
Tomorrow weekly jobless claims come out and some are expecting a decline after the recent rise in claims. December durable goods orders will also be out in the morning with another Treasury auction at noon with $29B of 7yr notes. Looking ahead to Friday, we have the advance report on Q4 GDP.
Crude price increased today, after declining $2.30 yesterday. There is interesting resistance for crude at $32.50, currently $31.90. Selling crude recently has become way too easy, usually that leads to in this case a lot of short-covering that may pull prices higher. Since crude has had so much impact on markets and inflation thinking it has to be monitored closely now. As long as the price holds under $32.50 the bearish bias is intact.
I have been cautiously floating for a week now with some gains but not much. Tomorrow if the 10yr fails to break below 2.00%, I might be changing my stance as it is too quiet right now. Our techs are weakening in the absence of price improvements. The wider picture however remains positive for interest rates for the present. The Fed, China, emerging markets and declining commodity prices along with growth outlook looking anemic are keeping rates in check but unless the buying continues in treasuries we expect prices will begin to weaken.
In summary, the Fed did not do anything to surprise us today and in its statement was words that had very little weight and meaning to them. With the 10yr still above 2%, the volatility is too great that a bounce could come when we are not expecting it. However, the long term does still point to better rates in a few months.
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