WEDNESDAY AFTERNOON UPDATE:
Well, today’s Fed events went as planned for the most part but we are not seeing
the reaction in the bond market or result that was expected. In fact, what
we are seeing doesn’t really make much sense. Ugly is one word we could use
to describe it although many others could apply. And causing further
confusion is the fact that stocks did react to the news just as we thought
they would.
The Dow is currently down 167 points while the Nasdaq has lost 35 points.
The bond market is now down 33/32 (over a pull point), which is going to
cause sizable upward revisions to mortgage rates. I suspect that many
lenders made more than one revision from this morning’s pricing, but you
should see an increase of approximately .750 of a discount point over this
morning’s rates. This move certainly appears to be overkill and a complete
overreaction. Unfortunately, as we have seen so many times in the past,
rates spike higher much quicker than they move lower. I would like to say
that tomorrow is a new day and let’s see what happens, however, there is
little chance of seeing a total reversal of this afternoon’s revisions by
the end of the week unless something very much unexpected happens.
The FOMC meeting adjourned at 12:30 PM ET today with no change to key
short-term interest rates. That was widely expected and was not much of a
concern. The post-meeting statement changed slightly from the last one,
hinting at a more optimistic outlook on the economy. In fact the statement
said specifically that "downside risks" to the economy and
employment have "diminished." They did acknowledge that the
unemployment rate is still too high, but the overall tone of the release
indicates a slightly brighter outlook.
The big topic everyone wanted addressed was the status of the Fed’s current
bond-buying program (QE3). The Fed said earlier in the day that the current
program of $85 billion a month in purchases would be maintained in the
foreseeable future. However, in Chairman Bernanke’s press conference this
afternoon he clarified that position by indicating it could be cut back if
the economy continues to improve. He also put a time frame with that
statement that points towards the fall or winter of this year. He also
stated that the program could end altogether by the middle of next year.
That is what appears to have been the catalyst for this afternoon’s
sell-off in stocks and bonds.
It was believed that the recent weakness in bonds (and upward move in
mortgage rates) was a result of speculation that the Fed had plans to slow
the pace of QE3 later this year or early next year. Therefore, the fact
that it was clarified today should not have been a surprise to anyone. It
was believed that an announcement of such would be old news and on a worst
case scenario bonds and mortgage rates would remain near their morning
levels. On the other hand, an indication from the Fed that there was no
plan in the near future to start winding down the program would have fueled
a significant bond rally, leading to a nice improvement in mortgage rates.
So, this afternoon’s move in bonds and mortgage rates has left many of us
professionals scratching our heads in disbelief. And as mentioned above,
throwing salt on the wound is the fact that stocks are now in selling mode
and showing sizable losses, as they were expected to do.
Tomorrow has three pieces of data that may influence mortgage rates, but
none of this data is important enough for us to hope for a correction in
this afternoon’s selling. The first is the weekly unemployment update from
the Labor Department. They are expected to announce that 340,000 new claims
for unemployment benefits were filed last week. This would be an increase
from the previous week’s total, meaning that the employment sector weakened
slightly. Ideally, we would prefer to see a large increase in new claims.
The second report of the day comes at 10:00 AM ET when the National
Association of Realtors posts May’s Existing Home Sales report. This report
tracks resales of existing homes, giving us a measurement of housing sector
strength. It is considered to be moderately important to the markets, but
can influence mortgage rates if it shows a sizable difference between
forecasts and actual results. Analysts are currently expecting to see a
slight increase in sales, pointing towards a stable housing sector. That
would be neutral news for the bond market and mortgage rates. A weaker
housing sector makes overall economic growth more difficult, so a sizable
decline would be good news for bond traders and mortgage shoppers.
May's Leading Economic Indicators (LEI) will also be posted at 10:00 AM
tomorrow. The Conference Board, who is a New York-based business research
group, will post this data. It attempts to predict economic activity over
the next three to six months. Good news for mortgage rates would be a
decline in this index, but it is expected to show a 0.2% increase from
April's reading. This means it is predicting a slight increase in economic
growth over the next several months.
If I were considering financing/refinancing a home, I would.... Lock if my
closing was taking place within 7 days... Float if my closing was taking
place between 8 and 20 days... Float if my closing was taking place between
21 and 60 days... Float if my closing was taking place over 60 days from
now...
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