Big Week for the Financial Markets - Mortgage Rates Could Be Affected on FOMC Statement

This is a big week for the US financial markets. The headliner is the FOMC meeting, Yellen’s press conference and the Fed’s quarterly forecasts for inflation and GDP over the next two years. The economic calendar also flush with key data and Treasury will auction $56B of notes and bonds. Within the last hour we have seen the market turn a bit positive after being in negative territory this morning. At 11:00AM, the 10yr has dropped its yield to 2.19% and MBS are now positive and moving up. 

On Wednesday, the Fed will increase the federal funds rate by 0.25%, which has already been discounted in markets. The issue, or question, is what the policy statement and Janet Yellen will frame for markets to estimate a possible increase in Sept. The level of inflation is presently not an issue for the Fed, running lower than the Fed’s 2.0% target. It more likely falls on whether the Fed thinks the economy may be overheating based on how equity markets have performed this year. In the WSJ this morning front page article about how the Fed is increasingly concerned that financial markets are over-extended. Interest rates falling after the Fed has increased rates four times over the last two years and the stock exchange very over-bought. Even the most bullish funds and large investor firms agree, but no one appears to be the first to jump ship. Last Friday the NASDAQ down 114 points, the largest decline in many months but the DJIA +89.

Crude oil trading higher this morning, recovering some of the massive declines over the last ten sessions. Gold lower. The dollar index about unchanged but the dollar is weaker against the yen and euro currency. Should be a quiet one today with only the Treasury auctions, although the demand for the 10yr will be of particular interest for mortgage rates. From what I am seeing thus far, I believe the preliminary data on these have been positive – thus the reason in the current movement on the market. 

The FOMC and Yellen on Wednesday then a heavy data calendar on Thursday have the potential for increased volatility. Over the last couple of weeks, bond market volatility has been low. In the equity markets, volatility is almost zero suggesting investors and markets, in general, are too complacent now.