Mortgage Rates Better Before Fed Announcement

Overnight US treasuries held well into this afternoon’s FOMC meeting and key economic data. At 11:00AM, the 10yr is at 2.44% after hitting a low of 2.42%.  MBSs are trading positive, but still in a tight range that has been favorable to mortgage rates and the pricing that came out today from the various banks.

Early this morning weekly MBA mortgage applications were down, but that is to be expected this time of year. In Europe stocks backed down and rates edged a little lower ahead of the FOMC this afternoon. November retail sales were soft compared to estimates, and making it a little worse, October sales were revised lower.  On inflation, November PPI was higher than anticipated. The two reports, one weaker to bonds, the other better for bonds - there was no change in the bond and mortgage markets on the initial reactions.

Later we got November industrial production came in also lower than anticipated – and Manufacturing output was soft. Vehicle production, which had been a leading strength for manufacturing with five straight gains, fell a steep 2.3% in the month with assemblies of light trucks falling. Utility output fell as well for the third steep decline in a row.

The last data today was October business inventories, which also was down than expected, and the weakest since November 2015. September was also revised downward.  Both retail and wholesale inventories fell this month with manufacturing inventories unchanged.  Sales have been better recently - the decline in inventories suggests a re-build that will be a plus when calculating Q1 2017 GDP - but a drag on Q4 2016 GDP.

Now markets will wait to see and hear what the Fed thinks about the economic outlook, on inflation and any hints about what it will do to increases the FF rates. An increase now will be 0.25% increase. Since the election, the stock market has exploded on the belief that the new administration will change everything that has held back growth. Less regs, increased wages, huge fiscal spending, and better global trade deals. How will the FOMC see it? How will the statement paint more increases and when? Markets will be left to divine the always obtuse statement. Also, the Fed will release its quarterly forecasts for growth and inflation over the next two years. The last two years the Fed has missed on growth and inflation forecasts - but as it is said, this time may be different; but still depends on what markets think. 30 minutes after the policy statement at 1:00 pm Janet Yellen will have her press conference - this one should be more interesting than recent press conferences.

In summary, I am looking for high volatility once Janet Yellen starts speaking at the press conference. The markets will be hanging on every word to try to get a handle on the future of the Fed Funds rate. Mortgage rates could go in either direction today depending on how she phrases her comments.