Mortgage rates lower for longer
Strong employment growth for the 100th straight month, continuing expansion in manufacturing, and positive indications that construction is growing; with more construction spending reported and higher than expected new home sales in December. These good reports would normally cause interest rates to rise. However, a looming government shutdown, trade talks, and a global growth slowdown are still protecting rates from the full impact of these positive economic indicators. We also have low inflation outlook and a Fed that has paused its rate hikes. The week ended with rates showing a small improvement over last week.
The main event last week was the monthly Fed meeting. Powell used the word “patience” 8 times. His speech indicated to the markets that they will not be in a hurry to raise rates anymore in the near term. Most of the market now has zero rate hikes priced into 2019. More importantly, we are watching to see if they will continue to reduce bond holdings that have supported the markets since the recession of 2008. This reduction in bond assets and purchases had more of an impact on markets than the actual rate hikes did, and was directly co-related to stock and rate volatility we had last year. Now that the Fed has turned more accommodative to the markets, we are expecting them to slow down on the path of reducing their bond holdings for now. It is important to keep in mind, we are still in an economic environment that is being propped up by Fed intervention. Both Stocks and Bonds are enjoying the return of an accommodative Fed for the time being.
What to watch for this week:
- The State of the Union address- a surprise statement could impact markets Wednesday morning.
- Fed speaker Powell- We are looking for clues on how they will proceed on their balance sheet reduction and interest rates
- US bond auctions happening this week to pay for our growing debt. The appetite for these bond auctions does impact rates if higher or lower than expected, as a reduced appetite will require a raise on the return on investment (rate) to attract buyers as supply (debt) increases. This is my main concern for rates moving forward and just something to watch.
As always, stay tuned.
* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.