Mortgage Market Update – March 7th, 2019
Recent Events Recap and The Fed
Hi guys! It has been a few weeks since our last market update, but there has really not been any material change to the overarching themes in the economy with Fed activity and global trade still decidedly in the driver’s seat. The Fed has successfully pivoted from a cadence of quarterly rate hikes to more of a wait and see approach, prompted in large part by the significant equity collapse at the end of last year, a general slowing of global economic growth, and muted inflation. The Fed’s plan for winding down or “normalizing” its massive portfolio of Treasuries and mortgage-backed securities has also shifted with most expecting operations to reduce its size subsiding later this year. Together, these actions have created a pretty favorable rate environment.
Trade
Moving on to trade, fresh headlines about negotiations between the US and China seem to make their way into the daily news cycle, though developments have been modestly incremental at best. It is pretty clear that a deal of some sort can be achieved, and risk markets have largely priced this in. So when a deal is announced I expect the kneejerk reaction to send both equities and rates higher, but we could quickly find ourselves in a buy the rumor, sell the fact scenario.
The Fed
Meanwhile, the Fed is trying to thread the needle with its monetary policy. Market participants have been pushing for a pause to this cycle of rate hikes and getting more aggressive in their appeal as stock prices have fallen. It wasn’t too long ago that 3 more 25 basis point hikes in 2019 was the consensus view, but that steadily faded. Now Fed fund futures are suggesting that not only will there be no hikes in 2019, but there could actually be a rate cut.
Interest Rates
Interest rates have been very stable in recent weeks, and the 10yr yield is firmly planted in the middle of the 2019 range. A recent technical development saw the 10yr move in an increasingly narrow short term range before yields broke out higher. Typically a break out of this sort of range results in significant follow through in the direction of the breakout—meaning I was expecting rates to move a fair amount higher. Fortunately, that did not come to fruition as they seem contented to drift about in the middle of the longer term range.
Employment Report
The monthly employment report is scheduled for release on Friday and may offer some short term direction for equities and rates. Bigger picture, I am still in the camp that interest rates will remain lower for longer and this should set us up well for the spring house-hunting season. We just need to see some more inventory come online.
Have a great week everyone.
Hance Thurston
Head of Capital Markets, Southern Trust Mortgage