Mortgage Rates Quiet Before Fed Announcement

As expected the bond and mortgage markets were still today ahead of the FOMC tomorrow afternoon. The 10yr and MBSs made a feeble attempt to gain ground early this morning but it did not take long for both the fall back to unchanged from yesterday. The Fed will increase the FF rate tomorrow afternoon by 0.25%, markets fully expect it and the Fed finally has room to move after months of debate among Fed officials trying to divine the future of inflation and economic growth.

The election of Donald Trump has turned every outlook from questionable to a strong belief that 2017 will see better wages, stronger consumer confidence, lower taxes and a huge reduction of regulations that were set by the Obama Administration. Fiscal spending is on the horizon per Trump - the Keystone Pipeline, bridges, railroads, highways, sewers, etc. Whether it comes in 2017 however remains a big question in our minds.  Once Trump is seated he has to face huge deficits ($19 trillion and increasing), adding more debt will not go down easily with many Republicans and even if it does the consequences are currently being ignored on the money grab in the present equity markets; that will be left to another day.

The strengthening dollar also being left out of the discussion, as the dollar increases the global debt in US assets will press on other economies. There is approximately $10 trillion in dollar-denominated debt outside the United States per the Bureau of International Settlements. US economic growth will run head-on into weaker growth in emerging markets and other central banks continuing to add stimulus and keeping rates comparatively low compared to the US. No one cares now - there is not even a hint that investors are concerned about anything now.

Treasury found good demand for the re-opened $12B 30yr auction this afternoon. Yesterday’s 10yr was soft but investors stepped up for the 30. Prior to tomorrow’s FOMC there are several key economic reports.  Not too sure they carry the same weight as usual with the economic outlook in 2017 looking exceptionally strong now. If the data is softer than estimates look for markets to ignore it. At 7:30 November retail sales and November PPI.  At 8:15 November industrial production and November capacity utilization.  At 9:00, October business inventories.

In summary, since the Presidential elections, rates have done nothing but want to move higher.   Tomorrow, we get the Fed announcement and without a doubt they will be hiking which is priced in but market will be paying attention to the press conference and the written statement to hopefully get a hint at the future timing of more hikes. As much as I want to be aggressive and say float, I think locking is the way to go.  Even if we rally, I think it will be met with selling.   Locking is the safe call.