Bulls & Blogs

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By G. Steven Bray

We have an interesting contrast setting up. As I mentioned last week, I’ve been paying more attention to inflation data recently as inflation is the enemy of low interest rtes. Recent economic data had shown budding signs of inflation, but last week’s jobs report kind of squashed that. Wage inflation was a third of expectations, and the previous month’s elevated number was cut in half.

What does that mean? Wages are the vast majority of business expenses. When wages rise, it puts pressure on retail prices. Wages hardly budged during the economic recovery, which resulted in negligible inflation. Last week’s jobs report suggests that wage growth remains weak, and thus prices are unlikely to shoot higher.

Here’s the contrast. Several members of the Federal Reserve recently stated they see rising inflation, which suggests they’ll be more aggressive about hiking interest rates to slow down the economy. A more aggressive Fed will tend to push mortgage rates up, but if wages aren’t growing, homebuyers won’t be able qualify. Instead of choking inflation, a more aggressive Fed may choke the economy.

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

The normally dovish Fed head Yellen squashed dreams of lower interest rates a couple weeks ago when she said she thinks the economy is just peachy and she sees many more rate hikes in the next couple years. Bond traders headed for the exits, and interest rates shot up.

Her pronouncement reinforced the prevailing market sentiment that due to the Trump administration’s policies, economic growth and inflation are likely to exceed current expectations.

While that’s a reasonable conclusion, and it makes sense be cautious if you’ve not locked your mortgage rate, I don’t think the market is going to run away again like it did after the election. There still are so many unknowns concerning the new administration’s policies and how the world will react, in addition to the many other hurdles already facing the world economy.

The one economic measure that has my eye right now is inflation. While the Fed’s preferred measure, the core PCE index, remains benign, other measures are starting to tick up, and consumer expectations of inflation also are rising. Of course, those expectations could quickly reverse if oil prices start falling again.

The result of all this, I think, will continue to be market volatility. While market sentiment favors slightly higher rates, volatility would allow you to find a friendly dip to lock your rate.

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Mortgage rates have finally settled down a little from their post-election romp. We’re still seeing volatility with big changes from day-to-day, but overall, the market seems to be waiting for the next big thing.

That thing may happen tomorrow. Before the election, we fretted about the European Central Bank’s decision on whether it will begin to taper asset purchases. It promised to let us know at its Dec 8th meeting. Last week, a leaked report suggested the decision had been made – tapering would start. But, then the Italians resoundingly defeated a measure supported by the financial elite that would have given the prime minister more power to implement austerity measures. Now, the press is talking about how long Italy will remain in the EU.

If the ECB starts to taper, the decision is likely to drive up bond rates, and markets seemed to price-in that decision earlier this month. However, if the ECB postpones the decision again, we’ll probably see rates fall, maybe as much as a quarter-point. Markets this week seem to be hedging towards the latter outcome with rates improving slightly.

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

What a difference a week makes. Before the election, market analysts were virtually unanimous that a Trump victory would scare markets, resulting in temporarily lower rates. The spookiness lasted less than 12 hours. By the time the nation awoke Wed morning, markets had reversed their Tues night collapse. Market momentum kept bond buyers sidelined and pushed rates up.

If you search for reasons for the sell-off, you’ll probably find references to Trump’s policies igniting inflation. I’m calling BS. While that could be an outcome, the assumptions some analysts made – that he’ll tear up NAFTA, impose tariffs on foreign goods, and shut off immigration – are overblown and even if anything like them comes to pass, are many months, if not years, in the future. Tax cuts and infrastructure spending could boost the economy, but we don’t even have concrete proposals yet.

I suspect the reaction had more to do with the elimination of election uncertainty combined with concern that the European Central Bank will start closing the money spigot in Dec. Market sentiment started edging towards higher rates a couple months ago. The election just gave bond sellers a push, especially if they needed funds to jump on the stock market rally.

So, what do you do if you didn’t lock your rate before the election? I suspect we’re doing to be stuck with these higher rates for a while. That said, a big market move like this one increases the chances of a temporary reversal. Investors will see bonds as cheap and start buying, which will push rates down. However, such a reversal is not a certain outcome. I suggest you pick you maximum pain point, and if rates keep rising, lock if they reach that point.