30 Jul Locking Bias
Yesterday’s Federal Reserve policy announcement helped calm fears in the bond market. However, there was very little verbiage to change the sentiment in the market. The Fed failed to offer any clues as to when the first rate hike will be announced. However, the market is still anticipating a shift in Fed policy to be implemented prior to the end of 2015. Many analysts speculate that the September 17th Fed meeting will now be the one where a rate hike is announced. Since the Fed initiated near 0% interest rates to help support a failing US economy, it certainly seems justified that current economic conditions warrant a move higher. The markets have anticipated this move and have already priced most of the potential impact into current bond pricing. Therefore, it should have minimal impact to mortgage interest rates when the move occurs.
We received the first look at 2nd quarter GDP this morning. Although the estimate came in at 2.3%, it was still below what the market was anticipating. Therefore, the bond market responded favorably to the report. Further, the 1stquarter GDP was revised higher from an anemic -0.2% up to +0.6%. However, since the 1st quarter is now old news, the impact in the market was minimal. Within the GDP report, we also get an averaged Year-Over-Year Personal Consumption Expenditure (PCE) number for the quarter. It showed a significant move higher, from 1.0% to 1.8%. Since this is the Fed’s favorite reading on inflation, the large jump is concerning. Since the Fed’s target is 2.0%, this could be the news the Fed needed before making the move to increase short term interest rates.
Although bonds are slightly higher this morning, they remain beneath significant overhead resistance. Unless they are able to make a break above this level, we will maintain our locking bias.