Wednesday, April 27, 2016 - Article by: Bart Castelli - Homestar Financial Corporation NMLS #70864 -
The FOMC left interest rates unchanged, which was no surprise, as that was not even in the discussion. The policy statement as usual caused a lot of initial debate of which I see the statement as somewhat positive for interest rates in the near term. As I have hinted for several days, the 10yr was hitting another support level. It held today, tested it on the knee jerk reaction to the FOMC, and then settled down under 1.90% to 1.85%. I would not say the statement was extremely positive but enough to take some of the present bearishness out of the market. The statement was about the same as at the March meeting. The Fed remains data dependent, nothing new in that. A lot of talk these days about wages increasing and consumer attitudes improving, yet consumer spending is not increasing.
Tomorrow Treasury will resume its auctions with $28B of 7yr notes. Q1 advance GDP will be released at 7:30 along with weekly jobless claims. The advance GDP report is normally adjusted a month later when the preliminary GDP report is reported - the generally accepted estimate from economists is growth at 0.7%. US markets will also have the BofJ meeting to think about tomorrow morning.
Looking ahead to next week there are a number of key data points the Fed and economic bulls will look at ISM indexes, April auto sales, Q1 productivity and unit labor costs, March construction spending, all leading to the April employment data. There are two days left before next week although investors have to be looking at the calendar.
The bellwether 10yr held at its minor support at 1.94% today and yesterday - now a bounce but the trend remains negative presently. The momentum oscillators still bearish and the 10yr is now confronting numerous key moving averages. The first step is always wobbly, do not read a lot into the rally today. What we do have now is a solid support point at 1.94% on the 10yr note, currently at 1.85%. That allows traders a base to take on some additional risk. It has to hold tomorrow or this will be a one and off rally.
Of course there's never a "sure thing" when it comes to floating, but this is certainly a case where the risks are lower than normal. If rates happened to be moving higher tomorrow morning, it should not be by much.
In summary, bond markets breathed a sigh of relief today, as the FOMC's statement did not reference looming inflation or booming economic conditions. Since the statement was released, there was a lot of positive news all around - and what was surprising that there was not many banks repricing for the better - maybe tomorrow we will see what they may release. It is far too early to say if today's events will incite a lasting rally, but at least we survived the statement without losing ground. I still say we need bigger, "worser" news to start the next leg down in rates, the question is where that news comes from, and when. Less risk in floating now than there was yesterday, so if you floated until now, congrats, just be careful to watch developments.
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