Market Update

 

By Michael Flannelly

Secondary Mortgage Markets

 

Good Morning,

 

Mortgage Rates set to open slightly lower this morning after a jammed packed week of economic data and central bank decisions.

 

The FOMC, as expected,  raised the Federal Funds Rate on Wednesday by 0.25bps pushing the target range to 1.75% – 2.00%.

 

The FOMC’s Fed Fund Target projections “Dot Plot” also increased.    The Fed see’s 2 more rate hikes in 2018, 3 rate hikes in 2019, and 1 more rate hike in 2020. (See Dot Plot Chart Below)

 

The neutral Fed Funds Rate, which is the rate at which the Fed Funds Rate is not simulative or restrictive to the economy based on inflation, is projected at 2.90% longer term.

 

During the press conference following the decision, Fed Chair Jerome Powell said the economy is doing extremely well and he sees the unemployment rate falling to 3.60%.  He expects stronger wage growth in the quarters to come and inflation to rise above their target level. 

 

On Thursday the ECB said that it will slash its bond buying program in half this September and discontinue the program all together at the end of December.  Currently the ECB is buying 30 billon Euro’s per month of bonds in the hopes that increased economic growth will lead to higher inflation.  Unlike the U.S., Eurozone inflation has been flat to slightly weaker of the past year so the ECB discontinuing their QE program shows that they are optimistic that inflation will rise to their target fairly soon.   Finally the ECB said it will wait until the summer of 2019 for their first rate hike.

 

Bond Markets are not buying the story that inflation will rise at a faster pace and that the Fed can actually raise rates 2 more times this year and 3 times next year.  If they did the 10yr Note yield would easily be over 3% today.

But we need to remember that the Fed is still running off its balance sheet and the Treasury is issuing record amounts of debt to fund our projected 1 Trillion annual budget deficit.   Couple that with the ECB discontinuing to purchase bonds at the end year means we could see a supply/demand show down in the near future.   

 

Have a happy and healthy weekend.