Bulls & Blogs

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By G. Steven Bray

Bond markets have reacted favorably to Fed Chair Yellen’s dovish comments about interest rate hikes and the current state of the economy. Markets, both bond and stock, rallied, then rallied some more. Even a fairly strong jobs report last Fri couldn’t dissuade them.

On that note, let’s review some of the factors in play.

– Fed members cut their rate hike expectations for 2016 from 4 to 2. That wasn’t the surprise. The surprise was Yellen’s comments suggesting the Fed could consider a rate drop.

– European economic data remains pretty lousy, and German bond rates are near record lows. Low German rates exert downward pressure on US rates.

– Most economists have lowered their predictions for 1st quarter GDP, some to near zero. Remember that this is backward looking data, but it does suggest some inertia the economy must overcome to generate growth.

– Recent US manufacturing data is showing a rebound in that sector. That might suggest growth in the 2nd quarter.

– Wage growth exceeded expectations in last week’s jobs report. That could foretell budding inflationary pressures, which could force the Fed to raise rates more quickly.

On balance, I can make a case for optimism or pessimism concerning interest rates. In the short term, I think rates are likely to follow the lead of the stock market. The pullback from recent highs is helping rates, and weak earnings reports could accelerate the downtrend.

I’ll leave you with one note of caution. The Fed releases the minutes from its Mar meeting tomorrow. If other Fed members didn’t share Yellen’s dovish outlook, it could snuff out our rate rally. Personally, I think that’s unlikely.

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

By G. Steven Bray

Mortgage rates hardly budged last week. This consolidation trend is a nice breather for folks who haven’t locked their mortgage rate, but it will end, and that end may come in the next couple weeks.

Remember that we’ve been saying non-existent inflation and weakening global growth are fueling low interest rates. Last week, a couple economic data points indicated inflation may be rearing its head. This week, we get the jobs report and several other important economic reports. Analysts are predicting just south of 200k jobs created last month. A much higher number typically would unnerve rate markets.

However, times are not typical. While the US economy hobbles along, the rest of the world is in the dumps. But this hasn’t changed in the last couple months, so why aren’t rates and stock prices still falling? I think it’s blind hope. Central banks from Japan to China to Europe have promised to create ever more stimulus programs to prop up their sagging economies. Even though none of the previous programs has salved the wounds, there’s no shortage of snake oil.

To that end, the European Central Bank meets next week. Markets may wait to break their current trend until they see what magic its wand wields. If it’s not satisfying, the market swoon may begin again.

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

By G. Steven Bray

The end of Feb tends to be good for interest rates, but I’m feeling a little cautious at the moment. Rates this year have been following stock and oil prices down based primarily on fears about the global economy.

However that sentiment seems to have waned in the last week or so. Stock markets have responded with sizeable gains, and oil prices have stabilized a bit. Interest rates are off their recent lows, but they’ve refused to follow stock prices higher – so far. While I don’t think rates are in a hurry to head higher, the change in sentiment has arrested our downtrend.

Interestingly, most economic data still suggests a weakening picture. However, one report last week caught my attention. Inflation at both the producer and consumer levels ticked up last month. While the increase was fractional, and one month does not make a trend, inflation is the enemy of low interest rates. Markets barely reacted to the report, but it bears watching.

That aside, if you’re floating your interest rate, any down day for rates this week may be a good opportunity to lock. I think the risks outweigh the rewards at the moment.

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

By G. Steven Bray

Mortgage rates continued their magical ride last week, and it looks like the ride may continue for a while. Fear of a weakening economy continues to fuel the ride.

We may get a little more insight into whether those fears are justified this week. First up is Fed Head Janet Yellen who testifies before Congress on Wed and Thurs. Markets are pricing-in less than a 50% chance of another Fed rate hike this year. That’s very different from the Fed’s own indications of steadily rising rates. While the Fed’s decisions don’t control mortgage rates, we assume they are based on the Fed’s opinion of the strength of the economy. If Yellen suggests the Fed will hit the pause button, that will speak volumes to markets.

The other interesting information this week is the retail sales report on Fri. Consumer spending, while not terribly strong during this recovery, has been strong enough to provide for mediocre growth. However, much of that spending has been for automobiles and health care. Higher auto sales have been driven by subprime auto lending, which hit a 10y high last fall. Obamacare has caused health outlays to surge. Markets are watching for more broad-based retail sales growth. The absence of it lends support to the narrative of a weakening economy.

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

By G. Steven Bray

Mortgage rates continue to be tied to oil prices and stocks. When they rise, rates rise. When they fall, rates fall. It’s not always that way, but this “flight to safety” trading has been active for the last few weeks.

As I’ve stated many times, interest rates are sensitive to expectations of inflation and growth. World equity and commodity markets are reacting to indications of slowing growth, and that has the punditry whispering recession. I read a wonderful quote the other day. “Did you know that the stock market has predicted 27 of the past 11 recessions?” I don’t know if a recession is imminent, but the fear is good for rates.

One other factor you may want to consider this week is the Federal Reserve meeting. This is the first meeting after it hiked short term rates in Dec. While no one expects the Fed to hike rates again this month, markets will be very interested in the post-meeting statement. The Fed previously indicated it would raise rates 4 times this year, but bond markets are only pricing in two rate hikes. Markets are watching to see if the recent stock and commodity market volatility will force more alignment between the two.