Mortgage Rates Up - Waiting for the Announcement

Mortgage rates moved a little bit higher today, but this was due more to yesterday’s late movement than what happened today. Tomorrow the FOMC, the group will increase the FF rate, with Yellen following with her press conference. Both tomorrow and Thursday, the economic calendar is full. Over the last few sessions the rate markets have held well at the lows (yields) and the stock market continued to improve, or at least has not bent to the increasing belief the equity markets are over-extended fundamentally and very over bought technically.

The US bond and stock market have been buoyed for months with the dollar decline. Foreign funds pouring into the US capturing higher yields than other central markets using the currency markets as leverage. Treasuries have shown little movement ahead of the key events tomorrow, and stocks will not back down either. We doubt by this time tomorrow rates will be at these levels and stock indexes also will move. Also, tomorrow we expect currency markets will react in less than the complacent trading that has been the case recently.

It is well known that most Fed officials want another rate increase at the September FOMC, but at the end of the day it is about the status of the economy. The Fed holds that inflation will increase, primarily because the unemployment rate is at 4.3%. History confirms that when the unemployment falls to these levels wage pressures begin to increase and then prices follow. Is this time different? The Fed and most every economist believes it is no different than 70 years ago and years in between. This morning May PPI yr/yr at 2.4% exceeds the Fed’s target but it isn’t the PPI or tomorrow’s CPI data that the Fed views as the key measurement it will come with may retail sales also tomorrow when the personal consumption expenditures (PCE) is reported.

Thoughts to ponder - Washington in chaos, geo-political tensions are increasing (N. Korea, China and the mid-east), the EU facing the UK exit, the Fed tightening while the ECB and Japan continue to stimulate with negative interest rates, the dollar in what some refer to as free-fall. No matter how we look at it, and even the most bullish investors know the stock market is stretched tight and getting tighter every day. In periods like this it is best to stay with the technicals (price action) and follow the money - leave the forecasts, estimates, political views as a background and stick with what markets are doing. Presently the stock market is increasing and interest rates are declining. The technical analysis is presently neutral, not bullish or bearish for the bond market but has been bullish since May 9^th.  As for the equity markets, bullish but also more emotional than bond markets. Tomorrow now may be completely different.  

In summary, tomorrow will be a busy day and rates look to make a move one way or the other.  It is a foregone conclusion the Fed will raise its overnight rate.  The bigger question is whether it will alter the outlook for future bond purchase tapering.  The last few statements have been profoundly neutral, it would be a shock if there were any big surprises tomorrow.  I do not see a great likelihood of major moves either way for rates, but locking is always the safe route on days like these.