Mortgage Rates Waiting For Tomorrow

Tomorrow is the day markets may finally get the answer to when the Fed will move to tighten short terms rates. Why tomorrow? If the employment data tomorrow is weaker than forecasts that will take the September rate hike off the table, stronger will confirm the Fed is going to do it in September. The Fed needs two consecutive strong employment reports (July and August) to cement the increase at that time.  Sounds simple but it really is not.  The difficulty is defining weak and strong. What number would be expected strong? 225K, 250K, or 275K? There is the problem, what numbers will markets chose to define the July employment situation?

Leading into employment tomorrow is the intriguing market reaction. After the 10yr yield declined from 2.32% in mid-July to 2.14% on Monday, the rebound into tomorrow’s data has been very little. The 10yr yield up just 9BPS and MBS prices -49BPS. The DJIA declined for five consecutive sessions. Frankly, a number of people were expecting more selling in the rate markets. The bullish technical bias is still intact. There is deflation in commodity prices that continue to fall - the Fed’s 2.0% target is well off in the future. How does the Fed justify increasing the FF rate as global economies continue to slow, our exports declining, the dollar strengthening? The economy needs some inflation and the dollar has to weaken - increasing interest rates will not accomplish those requirements but will exacerbate the situation. If we had to justify the Fed increase we have to believe that the Fed needs to insure it can lower it if the global economies continue to decline, that will take the US economy down with it - the US cannot stand alone against the rest of the world slowing.

I am sure there will be a lot of eyes on what happens at 7:30AM tomorrow!