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This week’s FOMC meeting has adjourned with no change to key short-term interest rates, which was widely expected. However, the big surprise came in the announcement that the Fed was not ready to start tapering their bond buying programming, deciding to maintain the current pace of $85 billion a month. That was certainly not expected by the majority of market traders and analysts, who were calling for a reduction of somewhere between $5 billion and $20 billion a month and keeping the timetable of ending the program altogether mid-2014. I can say I am a little surprised at the decision, although I was predicting a small token reduction instead of a big move. But, the basis they are using for not adjusting their purchases is exactly what I used on my prediction….. that while economic conditions did improve over the summer months, it was at a slower pace than the Fed was expecting to see and weaker than what was needed to make a significant downward revision to the amou! nt of bonds being purchased under QE3.
There is so much to address from this afternoon’s events and so little room to post it. To summarize what happened, the Fed decided not to adjust their bond buying schedule and did not set an estimated date for that to happen. Yes, this more or less kicks the can down the road to be dealt with at the next FOMC meeting or the following one. Chairman Bernanke and friends appear to be more concerned about the economy sustaining growth on its own than they did before, so a delay in removing any stimulus is warranted. They also revised lower some economic growth predictions and indicated that 12 of the 17 FOMC members that were at this meeting now feel that key short-term interest rates will remain at current levels until 2015. The news was taken as extremely positive for stocks and bonds. The Dow rose to a new record high, currently up 130 points while the Nasdaq has risen 35 points. The bond market is currently up 37/32, which should cause an intra-day improvement ! to mortgage rates of approximately .375 – .625 of a discount point.
August’s Housing Starts was posted early this morning, revealing a 0.9% increase in new construction starts of housing projects. This was a bit lower than expectations, hinting at a weaker than thought new home portion of the housing sector. However, the variance was not significant considering the report is only moderately important to the markets. That has prevented the data from having much of an impact on today’s bond trading or mortgage pricing.
Tomorrow has three pieces of economic data set for release, but none of them are considered to be highly important so I would not be surprised to see this afternoon’s rally extend into morning trading. The first report will come from the Labor Department at 8:30 AM ET when they will give us last week’s unemployment numbers. They are expected to announce that 340,000 new claims for unemployment benefits were filed last week. This would be a significant jump from the previous week’s 292,000 initial claims, but this much of a move was expected due to complications in last week’s report. The Labor Day holiday affected numbers because government offices were closed and rumors that two states did not get all claims reported due to technical issues lead us to believe we will see a large correction in this week’s release. Because of the uncertainty, tomorrow’s release will likely have even less impact on the markets than it usually does, which often is minimal. !
The second and third reports of the day will be released at 10:00 AM ET. The second report is August’s Existing Home Sales from the National Association of Realtors. This report will give us an indication of housing sector strength by tracking home resales. It is expected to show a small decline from July’s sales, however, this data probably will be neutral towards mortgage pricing unless its results vary greatly from forecasts.
The Conference Board will post its Leading Economic Indicators (LEI) for August at 10:00 AM tomorrow. The LEI index attempts to measure economic activity over the next three to six months. It is expected to show a 0.6% increase, meaning that it is predicting moderate growth in economic activity over the next several months. A larger increase would be considered negative news for bonds and could lead to a minor increase in mortgage rates tomorrow.