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Saturday’s: 9AM 1590 AM/97.9 FM KVTA
Sunday’s: 7AM K-EARTH 101 FM
Rate sheets this morning likely slipping a bit from yesterday as bonds lose ground early. Reprice risk today is low, the losses will already be on the day’s rate sheet and the real fireworks come tomorrow after the Fed meeting. Today brings consumer confidence data at 10am ET though, which could see morning rate sheets come out a bit better or a bit worse depending on how much strength the data shows. Right now markets are still holding on hard to the idea that this month’s Fed hike will be the last, but the Fed has been very vocal about needing at least one more hike this year to quash inflation. That could all change tomorrow, one way or another. We want to float most loans into the Fed policy statement and Fed Chair Jerome Powell’s press conference that follows, to keep our options open. Unlike when the jobs data or inflation reports come out first thing in the morning, the Fed meeting gives us a chance to float and react since it happens in the middle of the afternoon.
The Fed is all but guaranteed to raise its policy rate tomorrow by 25 basis points, which has already been accounted for and is priced into rates. The real question is what the Fed will say in its policy statement about future rate hikes, since most Fed members have been very vocal that at least one more hike this year is needed. It won’t just be what is said by the Fed and during Powell’s press conference, but how the markets react to it.
After last month’s Fed meeting we saw rates rise, but then fall again when the CPI inflation data on July 12th came in a bit better than even what was expected. Most have pointed to the report as possibly being “one-and-done” though, since although the headline inflation number has come down dramatically the core number (which strips out volatile food and energy prices) has been a lot slower to do so. There is a lot of concern that we could see a strong labor market with increasing wages pressure prices higher, since when people have more money to spend they can pay more for goods and services. Despite all the talk of a recession we have seen so far a resilient economy and a strong jobs market, as well as a strong housing market. The inventory squeeze not only puts pressure on real estate agent and loan officer pay checks, it is keeping prices higher which contributes to the inflation the Fed is trying to quash.
The Fed is concerned that if it takes its foot off the pedal and coasts we could see a resurgence in inflation that would make it even harder to fight. Kind of like when you don’t take the whole course of antibiotics because you are feeling better but then the sickness comes back with a vengeance.
For loans closing in less than 15 days, cautiously float. The last few days though have seen the groundwork for rates to jump after the meeting, making it more of a possibility than it seemed to be a week ago. If you want to lock it for protection go ahead, but we could be leaving better pricing on the table tomorrow.
For loans closing in 15-30 days, float. We want to see what Wednesday brings us, and should only consider locking loans that would have trouble qualifying if rates moved higher. That said though, we need to recognize that a week ago it seemed like this meeting would help rates improve, but now it is definitely a coin flip and could go either way.
For loans closing in 30+ days, float. No reason to even consider locking these loans with the current outlook, let’s wait and see what the fireworks bring tomorrow.
Technicals:
The UMBS 5.5 coupon (MBS or mortgage backed securities) at 99.19, quite a bit worse than yesterday and already down -20bps on the day. I don’t like that mortgage bonds have fallen below the 99.48 level, but the technicals much less important than normal with tomorrow’s Fed meeting on the horizon.
The 10yr Treasury yield at 3.90, breaking though the 3.82 level once again, but more convincingly this time. Similar to mortgage bonds though, our hands are tied regardless of the technicals, waiting to see what happens tomorrow.
