Bulls & Blogs

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By G. Steven Bray

You can tell the European Central Bank is run by bureaucrats. Markets were expecting a straightforward answer on whether it will start to taper its asset purchases. Instead, we got a “not ready to tell you yet.” The market reaction was a muted sigh. On the one hand, it’s positive the ECB hasn’t decided to start tapering. However, punting the decision to another day just prolongs the anxiety.

It sounds like that other day will be the ECB meeting on Dec 8th at which time the head of the ECB has promised to let us know whether it has decided to continue or taper asset purchases. Interestingly, the Fed meets the week after that. It’s a good bet that if the ECB starts to taper, the Fed will raise short-term rates.

But that’s in the future, and remember that short term rates don’t dictate the medium-term direction of mortgage rates. What are rates going to do between now and then? Absent some extraordinary stimulus, I don’t think much. I think the market has a slight bias for higher rates at this time, but I bet 30y rates will stay well under 4% between now and the meetings.

Even so, upcoming events can cause volatility. The biggest economic news this week probably comes Fri with the Durable Goods and 3rd quarter GDP reports. A large departure from the expected 2.5%, plow horse growth could spook investors. Next week, the Fed meets. While no one expects it to change policy at this meeting because of its proximity to the election, the post-meeting statement could be interesting. The Fed used the statement at last year’s next to last meeting basically to announce it was raising rates in Dec. And, of course, the election is the following week, and there’s no telling how investors will react to the results.

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

By G. Steven Bray

Interest rates continued their rise last week reaching the highest levels in 4 months. They’ve plateaued so far this week, but don’t assume the market has lost its steam. As I mentioned last week, I think concern about what the European Central Bank will say this week is powering this run.

The ECB will announce its policy decisions on Thurs. The world’s central banks have been fueling an easy money bender for the last few years. Rumors that the ECB was preparing to taper its asset purchase program sobered up markets in a hurry a couple weeks ago.

When the Fed began to taper its quantitative easing in 2013, mortgage rates moved up more than 1% and fairly quickly. It took a couple years before rates began to approach the same levels as before the tapering announcement. Using history as a guide, the threat for higher rates is definitely real. While actions of the ECB don’t directly affect mortgage rates, the assets they purchase are fungible, and US bonds will feel an impact.

With the scary stuff out of the way, let’s be clear that ECB tapering is not a foregone conclusion. The European economy is still weak, and the Brexit is still a huge unknown. If you’re willing to roll the dice, it’s quite possible the ECB will announce an extension of its program, which probably would push mortgage rates back to the levels seen earlier this month.

We have one more thing working for us. I suggested last week that you keep an eye on inflation reports. The two most recent readings were weaker than expected, which takes some of the pressure off rates.

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

By G. Steven Bray

The mood of the market has shifted. The last few months has been marked by complacency. Interest rates might have been bounced around a little by surprising events and economic data, but overall, rates never left a rather narrow range. That may be changing, at least for the short term.

The mood seems to be one of fear – fear that central bankers are going to take away the punch bowl. Since the economic collapse almost 10 years ago, central banks have been pumping money into the world economies. One way they’ve done this is by buying sovereign debt, like US Treasuries bonds.

A rumor has been circulating that the European Central Bank (ECB) is talking about tapering its bond-buying program. The ECB denied this, but the rumor has taken hold. When the Federal Reserve hinted it would stop buying new bonds in 2013, rate shot up, at least temporarily, in what was termed the taper tantrum. Shortly thereafter, the ECB expanded its bond-buying, and even though the ECB buys European bonds, the spill-over effect has helped keep US rates low the last three years.

As long as the rumor has legs, rates will remain under pressure. The situation is exacerbated by recent not-so-bad economic data worldwide. I’m afraid even a weak jobs report this Fri may not be enough to relieve the pressure. If you’re closing between now and the election, my vote favors locking.

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

By G. Steven Bray

As expected, the Federal Reserve didn’t change short term interest rates last week, but somewhat surprisingly, interest rates fell a little. Maybe markets were more nervous than we thought about the Fed meeting. Fed head Yellen’s comments at the post-meeting news conference didn’t hurt. She seemed to make it clear most Fed members are still reluctant to raise rates. However, Yellen did signal that a hike before the end of the year, probably in Dec, is a real possibility.

The rate drop surprised me because so many so-called market experts are predicting higher rates. Despite those predictions, investors bought bonds, pushing rates down.

So, what does that do for market momentum? For now, it looks like it pretty much sapped it. While rates did drop a little, they simply moved to the lower end of the recent range, and they’re looking comfortable again.

A couple things on the near horizon could disrupt the tranquility. The first is next week’s jobs report. A report that misses expectations either way could give rates a nudge. The second is the resurgence of inflation, especially wage inflation. I think recent economic reports have been equivocal. A report that shows a definite rise could move rates up quickly.

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

By G. Steven Bray

Last Fri’s jobs report was supposed to be a defining event. Solid job gains were supposed to give the Fed the green light to raise short-term interest rates again in a couple weeks. I guess someone forgot to tell the employers. Instead, we got a mediocre jobs report and an excuse for the Fed to equivocate some more.

The actual jobs created were 151k. By itself, even this mediocre report could have given the Fed cover for raising rates given that Fed governor Lockhart said 150k would be good enough. However, the report was bookended by important reads on, first, manufacturing and, today, the service sector of the economy. Both reports were much weaker than expected and, I suspect, put a rate hike back on hold.

So, where does that leave us? It looks like we’ll be riding the range a while longer. The European Central Bank meets this week, but I think it’s unlikely to stir markets much. The next significant event is the Fed meeting in two weeks, and absent something unexpected, I expect rates will remain in a holding pattern until we get closer to the meeting.