Tuesday, 3/16/10 4:14 PM
At 2:15 the FOMC policy statement hit; as always media and talking heads tried to make something out of it, but as Bill Gross at PIMCO commented, it was a snoozer. The statement offered little in the way of change. "Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability". for the entire statement www.federalreserve.gov
The statement didn't change the "extended period" the Fed have been using to quantify the timing of an actual increase in rates as we thought they might. With no inflation to be concerned about and in effect already tightening by ending all but the TALF lending facility for commercial mortgages ( to end 6/30) by the end of March, the Fed has removed the punch bowl. Although the Fed continues to see the economy improving, the level of unemployment and the still wounded housing sector will keep the Fed from actually increasing the Fed funds rate anytime soon. KC Fed Pres Hoenig once again dissented, wanting more specifics in order to keep financial imbalances from growing with the use of "extended period" to delineate when the Fed would start increasing rates. As noted this morning, markets do not need any specifics; traders and investors will know well in advance when the Fed will increase rates.
For the mortgage and housing sectors (as well as the overall economic growth) the most significant thing in the statement was no waffling by the Fed on ending purchases of mortgages at the end of this month. What will that mean for mortgage rates once the Fed is finished? In the last two weeks the end has not only had no impact, mortgages were tightening against treasuries. Unlikely that will continue unless the mortgage markets actually begin to function much better. Questions abound as to how much mortgage rates will increase compared to the 10 yr treasury; some say 1.0% while others are saying .50%. Although the Fed didn't imply it would monitor mortgage rates to determine whether it may change course, we believe the Fed will watch it closely. In the meantime since the government owns Fannie and Freddie and GNMA controlling mortgage rates isn't that difficult.
Not much in the way of data tomorrow; the weekly MBA mortgage applications at 7:00 and at 8:30 Feb producer price index at 8:30, estimates are for -0.2% overall and ex food and energy +0.1%.
The 10 yr note is the rock; don't knock the rock. It has stayed put most of the time since Jan in its 11 to 12 basis point range from 3.72% to 3.60%., Mortgages are doing well these days even with the fear of increasing rates due to the Fed ending its purchases. At the end of the day traders as well as most of us are watching closely to see if the Fed's end will have what many believe will be an increase in the spread between the 10 yr and mortgage rates (mtgs moving higher in rate than the pace of the 10 yr note). So far the spread has gone the other direction, tightening. Conventional wisdom at times doesn't match up with market reality. Interest rates were boosted this afternoon after the FOMC statement didn't change much; leaving rates low for a long time (possibly throughout the entire year). With the perception of no rate increases and no inflation that may be the driver that keeps mortgage rates from widening.
PRICES @ 4:00 PM
10 yr note: 99.24 +12/32 3.65% -5 BP
5 yr note: 100.02 +7/32 2.36% -5 BP
2 Yr note: 99.29 +2/32 0.91% -4 BP
30 yr bond: 100.17 +21/32 4.59% -4 BP
Libor Rates: 1 mo 0.235%; 3 mo 0.260%; 6 mo 0.401%; 1 yr 0.871%
30 yr FNMA 4.5 Apr: 101.02 +6/32 (.18 bp) (+7/32 (.22 bp frm 9:30)
15 yr FNMA 4.0 Apr: 101.30 +3/32 (.09 bp) (+3/32 (.09 bp) frm 9:30)
30 yr GNMA 4.5 Apr: 101.20 +4/32 (.12 bp) (+5/32 (.15 bp) frm 9:30)
15 yr GNMA 4.0 Apr: 102.20 +3/32 (.09 bp) (+3/32 (.09 bp) frm 9:30)
Dollar/Yen: 90.29 -0.18 yen
Dollar/Euro: $1.3775 +$0.0099
Gold Apr: $1127.90 +$22.50
Crude Oil Apr: $81.80 +$2.00
Goldman-Sachs
Commodity Index: 525.57 +9.16
DJIA: 10685.98 +43.83
NASDAQ: 2378.01 +15.80
S&P 500: 1159.46 +8.95