Locking Bias

Well, today is the official announcement of the end of Quantitative Easing.  This historic intervention included nearly $3 trillion of investments by the Federal Reserve in the past five years.  When you think of the enormity of that number, it is astonishing to think that an investment of that size into our economy has not caused prices to inflate at nearly the level most economist anticipated.  If you think back to when the program was announced, many were expecting inflation to be greater than 5% by this time.  However, inflation is still well below the Fed’s target of 2%, and is currently in a downward movement.  This has the Fed worried that inflation will continue to stall, which would be a significant threat to our economic expansion.  Two of the greatest threats to our economy are inflation and deflation.  It is a delicate balance keeping these two in line.

The Mortgage Bankers Association released their Mortgage Purchase Application data for last week.  The report was a disappointing 5% drop in the number of applications taken.  This trend is not a good indication of where the housing market will be over the holiday season.  On a year over year basis, purchase applications are down 15%.  If we look back at where the purchase market was one year ago, it wasn’t a stellar time.  To think that we are still not improving as our overall economy is growing, may show that the reality of strength in the economy is a bit more subdued than many believe.

We seem unable to escape the volatility in the stock and bond markets, which makes the risk of floating high.  With today being a Fed announcement day, history shows that bonds don’t typically react well to the news of late from the Fed.  In a world without QE, it is uncertain how the markets will react.  We expect the extreme volatility to continue and possibly even escalate.  With mortgage bonds sitting just above support, we must be careful at these levels.  A break below could lead to a more intense movement that could notch mortgage rates a bit higher.