Today is Fed Day, with the Fed announcement to be released at 12:00 p.m. The big question is whether they drop the “significant time” verbiage when speaking about the timing of moving the Fed Funds rate higher. Although job growth has been strong, inflation has been well below desired levels, with deflation being a significant concern globally. Oil prices helped today’s Consumer Price Index (CPI) report, which showed a -0.3% drop. This was below the -0.1% expected, and comes just in time for the Fed to consider before they make their announcement today. When you strip out food and energy, the Core CPI was up 0.1%. On a year over year basis, Headline CPI dropped from 1.7% to 1.3%, and Core CPI dropped from 1.8% to 1.7%. With inflation figures this low, the Fed may be reconsidering a rate hike in 2015. That appears to be likely scenario at this point.
Russia’s economy continues to crumble as their currency is still in a free-fall. The Russian Ruble lost approximately 19% of its value in one day. In an attempt to fight the fall, Russia raised their short term interest rates by 6.5% yesterday. The basic idea is that if you increase the interest rate you pay more people will keep their money in Rubles. Although this may have helped for a minute, overall it did little to fight the cause. Further, the Russian economy is not able to sustain such an abrupt increase in their interest rates. This move will cause their economy to slip deeper into a recession. The situation in Russia can be summed up to two primary causes: Falling oil prices and sanctions against Russia. About 50% of Russia’s revenues come from oil and gas. A drop in a barrel of oil falling from $110 down to $60 will create major issues if oil is the primary source of revenue for your country.
Mortgage bonds continue to flirt with breaking above support. However, that move has still not happened. The stock market opened up strong again today, which is adding a headwind to the bond market. The volatility in the stock market continues to work against it, as overall stock values have been falling since December 5th. With bonds hovering right up against resistance, it will be soon when we know if we will see a break higher or if bonds will again be pushed down lower. Until we see the strength in the market to make a move higher, we will maintain a locking bias. We are closely watching the markets as we approach critical levels. Hopefully bonds can muster the strength to make a move that will improve mortgage rates. Cross your fingers!