I know that you know that this is the former Chair of the Board of Governors, Ben Bernanke, and not the current Chair, Janet Yellen. Ben Bernanke navigated the U.S. through the most difficult financial crisis in 80 years, and it is he who said “Monetary policy is 98% talk and 2% action”. That idea is a good way to introduce the Fed meeting yesterday.
The Fed raised the overnight lending rate to 1.25%, an increase of 1/4%. That will instantaneously raise the Prime Rate to 4.25%, affecting credit cards and other short-term debt instruments like car loans. It should also raise the yield on your savings account and certificates of deposit. The financial markets all expected this move and so the hike was already priced into long-term debt like mortgages, student loans, and the next iPhone.
Chair Yellen yesterday laid out a plan to begin to sell off the Fed’s $4.5 trillion dollars in long-term debt holdings. For the last eight years, they have been the world’s largest buyer of Treasury Notes and Mortgage Bonds, accumulating and then reinvesting the proceeds of sold Notes (from people cashing in Treasury Bonds or refinancing their mortgages) by purchasing new Notes/Bonds at the rate of $20-30 billion per month. That will begin to unwind once the Fed Funds Rate reaches 2.0% (presumably the first of next year). The plan is to allow $4 billion in mortgages and $6 billion in Treasuries to roll off the books every month, and to gradually increase the amount to a combined $50B/month “if the economy evolves inline with expectations”. Assuming that the hopes of the economy fulfilling the well-crafted statement come to fruition, it will take at least a decade to unravel the balance sheet in an orderly fashion.
After digesting the Fed Show yesterday, mortgage bonds took a slight breather and opened down by about 0.15 bps. Overall, interest rates are still better than they have been since last fall’s presidential election. Nationwide, the average conventional 30 year loan is at 3.91%. My rates are better than that and my service and turn times are also hard to beat!
It’s election day. And though we don’t actually put a piece of paper into a box anymore, as this finely manicured man-hand is demonstrating, it’s an important right as citizens of the best country in the world. I don’t do politicis so much, but I do vote. Word around the the political/market circles is that if Ms. Clinton conquers, stocks will rally as a result of continued congestion in Washington. Should Mr. Trump triumph, stocks would suffer and bonds would rally due to unsurpassed upcoming uncertainty. Nobody is even consudering a victory for the other dozen or so names on the presidential ballot today.
This is the moment that we have all been waiting all year for. Drumroll please…
Summer break is all but washed away. At our house the boys head back to school on Monday, which means that I need to try to remember how to set an alarm clock again.
Aside from Great Britain leaving the European Union a few months ago, the economic news has been really light. The lack of coverage might have something to do with the political productions playing out on stages large and small across the country. It’s reality TV that is actual reality, on TV.
Three Fed Governors spoke at various functions this week, and their message is all but congruous. San Francisco Fed President Williams said that the central bank should raise rates sooner rather than later. Dallas Fed President Kaplan said that because of the domestic economy’s sluggish momentum, the Fed really has no room to hike rates. St. Louis Fed President Bullard said that he can only see a single rate hike coming in the next two years.
Uncertainty typically breeds an environment in which interest rates remain low, as investors push their money into a vehicle offering a guaranteed return and the safe haven of capital preservation–bonds.
Two bits of information are important to reiterate today: Bonds are a safe haven for investment dollars and Bonds thrive on economic uncertainty. Investors use these secure vehicles (bonds) as safety nets when the risk of leaving assets in the stock market is greater than one’s intestinal fortitude will allow for comfortably. Consequently, the cost of entry into the bond market rose sharply this morning (driving down yields in the process–more on that later) as news hit the wires that the citizens of the United Kingdom had voted by a slim majority to leave the European Union. Now former Prime Minister of Britain David Cameron resigned after the vote to leave was finalized. It’s that bad. The price of Gold is also up almost 5% this morning.
The Fed Funds futures market is claiming that a July rate hike is off the table and that there is only a 12% chance that the Fed will hike rates at any subsequent meeting in 2016. Makes Fed Chair Janet Yellen seem like a prophetess given her remarks to Congress earlier this week. The net result of all of this is lower interest rates all across the board.
For the fourth month in a row, New Home Sales rise faster than expected. This month’s 619,000 newly constructed homes is 119% of what analysts predicted. Jobless Claims (first unemployment check requests) dropped 2.5%, and Durable Goods Orders shot up from 1.9% last month to 3.4% this month. Stocks are down and bonds are up, though quite modestly. Tomorrow brings another reading of the first quarter GDP. The last consensus was a 0.5% increase and the expectations are that tomorrow will show a 0.9% spike. Perhaps the additional data since the previous poll will facilitate that much-searched-for bump in perceived economic activity. Any surprises one way or the other in GDP will most likely cause a breakout in the Bond market (hence the Breakout picture). We’ll see tomorrow.
The close of business today marks the end of the first quarter of 2016. The stock market indices that were down as much as 10% a few months ago are now back in the black by about 1%. It’s quarters like this when investors look to the comfort of history, which shows that over the last 100 years, stocks have produces an annualized 10.3% return on investment.
Chicago Fed President Charles Evans will be speaking later this morning, just a day ahead of the monthly Jobs Report. Mr. Evans has supported Fed Chair Janet Yellen’s accommodative position, saying that the current low level of inflation makes raising interest rates a challenge. Even if the Bureau of Labor Statistics surprises us with a number way north of the 200K expected newly created jobs tomorrow, I think that 30 year rates in the 3’s are here (dare I say it) through the election.
For the eighth and final time this year, today is Fed Day. And for the first time since April 2006, the Fed raised rates today by 0.25%. It’s the first time since October 2009 that they have even touched them–well, directly that is. The Fed can only regulate their Fed Funds Index, which up until two hours ago had been at zero for the last seven years. Other than that, the Federal Open Market Committee ordinarily relies on hints and pointed observations to sway investor capital in and out of investments that drive interest rates on the longer-term loans. They of course also buy and sell billions of dollars worth of various debts every month to regulate the flow of money.
In her prepared statement this afternoon, Janet Yellen said that the Fed will remain accommodative, and reiterated their plan for a “gradual rise” in rates. Stocks are up about 1.5%, and Bonds are flat after the well-anticipated announcement.
I generally don’t put a lot of stock into revisions of previously published data. One of the reasons is that there is so much new information being released every day that it’s impossible to keep up while still trying to make this column mildly interesting, and the second is that with a number like GDP, it’s impossible to be absolutely accurate–even after a half dozen updates. Today’s second reading of the second quarter Gross Domestic Product came in at 3.7 though, which is significantly higher than the first reading of 2.3, and is cause for alarm among the Chicken Littles who claim that not only the sky, but the bottom as well is falling. I am not saying that it is or isn’t, just that the surge in growth proclaimed by the above graph is affecting the markets. Today, the jovial atmosphere is pushing the prices of both stocks and bonds upward.
Retail Sales lower than expectations at -0.3%. Stripping out car sales, the number only fell by -0.1%. That’s the only domestic report out today; the Producer Price Index and the Fed’s Beige Book come out tomorrow.
Greece made a $95M debt payment to Japan today. Banks in Greece are scheduled to reopen this Thursday after being closed for a two weeks now. It’s probably pretty easy to find $95,000,000 when the banks are empty and you have complete access.
Our mortgage bond pricing enjoyed a run up for the first week of the Greece debt crisis and has now slid back down to pre-crisis levels from the last week in June. We have hit a triple bottom and hope that we can continue to hold here. Looking at the chart for the last two years, this area holds a lot of support, but if pricing falls from here, rates will most likely climb another 1/4% rather quickly. Stay quick on your feet.
Money is flowing out of Bonds and into Stocks this morning after news that the latest $59,000,000,000 Greek bailout proposals mays appease creditors and keep the country in the European Union. Greece will most assuredly need to usher in tax increases and spending cuts to make payments this time around.
China’s whipsaw stock market is also making headlines again today as it closed this time on the upside. Regarding the economies of both countries, the question is whether there is real sustainable growth based on sound fundamentals or just fabricated headlines to appease big brother. No matter how you doll it up, a pig is still a pig I say. Disclaimer: I am in no way asserting that these countries, their citizens, or anyone descending from–or with ties to–these nations are anything less than the best of human kind. My assertion is simply that a healthy economy requires more than lipstick and rose-colored glasses.
Speaking of pigs, I had a delicious Brown Sugar Bacon and Pit Smoked Ham Sandwich on a King’s Hawaiian Bun at a reputable dining establishment down the street from my office (okay you got me, it was Arby’s) this week. What made the experience even more sweet is that when I got to the drive thru window to pick up my food, the gal handed me my bag and informed me that the car ahead had picked up the tab. It was the most gratifying lunch that I had all week and has caused me to look for more opportunities to be kinder than I need to be.