It’s a big week for economic news. Today, the Federal Open Market Committee (fondly known as the “Fed”) met. Interest rates were left untouched, but supporting commentary has tongues wagging. You can read the full press release here.
To help us mere mortals wade through the jargon and the sometimes not so obvious implications, I’m providing a guest post from Lance Kinkead from First Capital Mortgage, complete with recommendations:
This week’s FOMC meeting has adjourned with no changes to key short-term interest rates, as expected. However, also as expected, we are seeing some volatility in the bond market because of comments made that affect future changes to key short-term interest rates. The most notable was the dropping of the 6.5% unemployment rate as a threshold to trigger increases in those key rates. That makes it much more difficult for market traders to predict when the Fed will start raising rates that help set interest rates for credit cards, car loans, home equity loans and business borrowing. It also has many market participants concerned that the Fed may make a move sooner than previously believed.
The meeting did bring another $10 billion reduction in their current bond buying program (QE3). They now will be purchasing $55 billion a month in government and mortgage debt. The Fed also adjusted their predictions for benchmark economic indicators, slightly narrowing its range of overall economic growth for this year (from 2.8 – 3.2% to 2.8 – 3.0%). The news has had a negative impact on the stock and bond markets, causing most indexes to move noticeably from pre-adjournment levels. The Dow is currently down 138 points while the Nasdaq has lost 34 points. The bond market is now down 27/32, causing broad upward revisions to mortgage rates. This move should translate into an increase of approximately .375 – .500 of a discount point from this morning’s pricing. Unfortunately, that may not be the end of today’s revisions either.
Overall, some of this afternoon’s events are not so anti-bond. The stock selling helps support that (bad for stocks is usually good for bonds). However, I believe the confusion and uncertainty of when the Fed will make a move is driving this afternoon’s bond selling. The benchmark 10-year Treasury Note yield is currently at 2.77%, putting it back near the middle of its recent trading range. There is a fairly decent possibility that today’s upward move in yields and mortgage rates is a bit of an overkill and we could see some of this afternoon’s move recovered soon. But until we get some stabilization in this area, I strongly recommend proceeding cautiously towards mortgage rates as it is possible that the 10-year could move closer towards 2.90% before moving lower- especially if stocks rebound.
Tomorrow morning brings us the release of three pieces of economic data that have the potential to affect mortgage rates. The first is last week’s unemployment figures at 8:30 AM ET. They are expected to show that 330,000 new claims for unemployment benefits were filed last week, up noticeably from the previous week’s 315,000. Since rising claims for unemployment benefits is a sign of a softening employment sector, the higher the total claims the better the news it is for the bond and mortgage markets. Negative news for rates would be another decline in initial claims, hinting that the sector is actually strengthening.
February’s Existing Home Sales will be posted at 10:00 AM ET tomorrow morning by the National Association of Realtors. It will give us a measurement of housing sector strength and mortgage credit demand. It is expected to reveal a very small decline in home resales, meaning the housing sector was flat last month. Ideally, bond traders would prefer to see a decline in sales, pointing towards a weakening housing sector. Bad news would be a sizable increase in sales, indicating that the housing sector is gaining momentum. That could be troublesome for the bond market and mortgage rates because housing and unemployment the two primary hurdles the economy has to overcome. A soft housing sector makes broader economic growth less likely, so the weaker the level of sales, the better the news it is for mortgage shoppers.
Lastly, the Conference Board will post its Leading Economic Indicators (LEI) for February at 10:00 AM Et also. This index attempts to measure economic activity over the next three to six months. It is considered to be moderately important, but likely will not have a significant impact on mortgage rates. Current forecasts are calling for a 0.3% increase, meaning it is predicting that economic activity will likely expand modestly in the coming months. A smaller than forecasted rise, or better yet a decline would be considered good news for the bond market and mortgage rates.
If I were considering financing/refinancing a home, I would…. Lock if my closing was taking place within 7 days… Lock if my closing was taking place between 8 and 20 days… Lock if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now…
Should be an interesting couple of days. Tread cautiously and contact me or Lance with questions.