This week’s FOMC meeting has adjourned with no change to key short-term interest rates. This was widely expected and had no impact on this afternoon’s trading. The verbiage in the post-meeting statement changed a little from the last meeting, which was expected by some market participants. The change came where previous statements read they would keep short-term rates at current levels for a “considerable time” now says they will be “patient” towards rates. That was taken as an indication that the first rate increase will come sooner than later.
The Fed’s economic projections did not vary too much from their previous update with the range of overall economic growth unchanged. Their estimates for the unemployment rate for the end of next year was lowered slightly, meaning they are expecting strength in the employment sector. The bit of good news for bonds came in the inflation estimates that pointed towards inflation falling short of the Fed’s goals.
The markets were back and forth following these 2:00 PM ET announcements. The solid move upward for stocks and the downward turn in bonds came during the press conference with Fed Chair Janet Yellen. The most important remark from her appears to be where she narrowed down the range of when the Fed would start raising rates. She said it wasn’t expected to happen until after a “couple of meetings” next year. Then she followed that with “I believe the dictionary says a couple means two”. Since the FOMC group meets near the end of January and again in mid-March, her comments make it sound as if the first rate hike could come during late spring or early summer.
Overall, it appears this afternoon’s events were taken as negative for bonds and mortgage rates. The major stock indexes are rallying hard with the Dow up 262 points and the Nasdaq up 89 points. The bond market is currently down 22/32 (2.13%), which is enough of a move for many lenders to revise rates higher by approximately .125 – .250 of a discount point from this morning’s pricing.
November’s Consumer Price Index (CPI) was posted at 8:30 AM ET this morning. It showed a 0.3% drop in the overall reading and a 0.1% increase in the more important core data that excludes volatile food and energy prices. The overall reading was weaker than expected while the core reading pegged forecasts. They both indicate inflation remains subdued at the consumer level of the economy, so we can consider the data slightly positive for bonds and mortgage rates.
Tomorrow has two pieces of economic data scheduled for release, but neither is considered to be highly important. The first is last week’s unemployment numbers at 8:30 AM ET. They are expected to show that 292,000 new claims for unemployment benefits were filed last week, down slightly from the previous week’s 294,000 initial claims. Rising initial claims indicates employment sector weakness, so the higher the number the better the news it is for bonds and mortgage rates. Although it is worth noting that because this is only a weekly snapshot, it usually does not cause much movement in mortgage pricing unless it shows a significant variance from forecasts.
At 10:00 AM ET tomorrow morning, the Conference Board will release their Leading Economic Indicators (LEI) for the month of November. This release attempts to measure or predict economic activity over the next three to six months. It is expected to show a 0.5% increase, meaning that it is predicting economic growth over the next several months. This probably will not have much influence on bond prices or affect mortgage rates unless it shows a much stronger reading than forecasts. The weaker the reading, the better the news it is for bonds and mortgage pricing.