19 Aug You Sick of Fed News Yet?
The economy is a baby bird and the Fed is the mother who needs to find out if it can fly. Instead of the original mid 2022 departure date, the Fed sounds like it’s throwing the economy out of the nest this year! Stimulus tapering is a complex topic but the Fed has made it clear where they are trimming the fat first… Mortgage Backed Security spending. The Fed spends hundreds of billions every week on economic stimulus in multiple sectors. However, with the massive success of the housing industry over the last year, the Fed thinks it’s the first sector the fly.
Dovish Fed members are looking for two things.
- Decreased unemployment
- And they are getting this. Over the last week, we have seen unemployment fall to pandemic lows. Today, Jobless Claims came in at a 348k, another pandemic low. Now, this date is lagging because it is from the prior month. Going forward, the big question is not if the Delta variant will take a chunk out of this progress, it’s how big the chunk will be.
- Like we talked about yesterday, Dovish Fed members care more about employment and GDP than inflation… and that shows in their idea of stable inflation. Our last inflation reading started with a 5. However, the Fed believes we are on track to stability and that inflation will average out around 2% over the next year.
This tapering is not good news for mortgage rates. Why? Because the lower demand the market has for Mortgage Backed Securities, the higher their return needs to be. Meaning higher mortgage rates. The mortgage market is not the only one feeling this. Because bond returns are increasing, smart money is leaving the stock market for the security of the bond market. This combined with the increasing Delta variant numbers have caused a 160 bps drop in the S&P over the last 5 days.
We have another day in the green as we climb back after the two week slide in the beginning of August. Today, we are sitting on the 50% Fibonacci level. Closing above this would be great news as it was a strong floor during July. However, bouncing below it is a strong possibility and because of that, we are holding a locking bias.