The Federal Reserve will be cutting short term interest rates by another 1/4% today, making the total cuts so far in 2019 3/4%. This cut is largely already baked into both the stock and bond markets. The key will be in the statements that Fed Chairman Jerome Powell will make in the policy statement immediately following the announcement. If Powell signals that this will be the last cut in this “mid-cycle” rate adjustment, we could see the markets react negatively. Such a statement could help mortgage bond pricing, as it could take some of the steam out of the stock market. For the sake of interest rates, it would be nice to see the stock market settle down and take a more realistic approach as to where the economy is heading. It’s hard for stock investors to see negativity in the future when the economy is showing great strength. However, that is the point at which investors should be concerned about the future. Falls always happen after hitting peaks. Are we now at the peak? With the Unemployment Rate now at 3.7% (a 50-year low), it would be irrational to assume it will go much lower before heading higher.
We also received an update on GDP, which showed a pace of 1.9%. Although this is still a decent level, it conforms a slowing trend. I expect to see this continue to fall in 2020, especially if a trade deal is not reached with China.
Today’s ADP employment report showed there were 125,000 new hires in the month of October. In addition, September’s report was cut by 42,000, taking that month’s total to 93,000. This also confirms a slowing trend. I expect that Friday’s Bureau of Labor Statistics (BLS) to come in below 125,000. If this happens, that would be good for the near-term direction of mortgage interest rates.
Mortgage bonds are higher in early morning trading. Ahead of today’s Fed rate cut announcement, we can expect to see volatility increase. Hopefully we will see bonds continue to climb higher. However, if the risk of floating makes you uncomfortable, locking is the safe play.