Mortgage Market Update – November 13th, 2018
FOMC and Rate Update
Hi guys. We are coming off an extremely event-filled week with both the mid-term elections and the November FOMC meetings taking place, both of which had the potential to materially influence market sentiment. However, anybody making a volatility play last week was likely left disappointed. Heading into the elections, pollsters were calling for Democrats to pick up enough seats in the House to earn a majority while losing a couple of seats in the Senate. Clearly, the credibility of pollsters had suffered given the results of the last few elections—most notably the 2016 presidential election—but this time they largely got it right. Markets barely had time to take a sigh of relief before turning to the Fed’s rate decision, but this too proved a bit anticlimactic. The policy statement was essentially a cut and paste from the last meeting and they left rates unchanged as expected. Fed officials did reiterate the need for future rate increases, and markets continue to price in one more 25 basis point rate hike in December and then about three hikes next year. So what was the market’s response to last week’s activity? Well, the 10yr yield opened the week at 3.19% and closed out on Friday at 3.18% while equities were generally higher. This does mask a few whippy trading sessions intra-week, but the overall sentiment is roughly unchanged.
Forecasting
Looking ahead, this upcoming week does bring a couple of key data points even if it is lacking a true headliner. The Consumer Price Index will be out on Wednesday and is expected to mirror the uptick we saw in the Producer Price index last week. Inflation definitely seems to be edging higher which will only embolden the Fed to continue this tightening cycle. Retail Sales is the other important release and comes out on Thursday. Market participants who were left wanting more after last week’s FOMC meeting will likely tune in Wednesday evening to hear Fed Chair Jay Powell give a speech on the economy at an event in Dallas. Don’t expect him to make a big policy shift here, but even a change in nuance could result in a tradeable event.
Rates are stuck in a range and the 10yr seems capped at 3.25%. In my opinion, it will take something on the order of a trade deal with China for yields to punch through that level. Bond markets are closed today in observance of Veteran’s Day. We at Southern Trust are open for business but to all of our vets out there from the bottom of our hearts, thank you for your service. Have a great week everyone.
Hance Thurston
Head of Capital Markets, Southern Trust Mortgage