Today is all about this afternoon’s FOMC policy statement, the Fed’s quarterly outlook on inflation and economic growth, and Janet Yellen’s press conference. Yellen is going to face a number of key questions this afternoon; after the May CPI yesterday, markets are focused on how the Fed will frame it in terms of increasing interest rates. A lot was made out of the surprising increase in CPI yesterday, it isn’t a trend yet; one month of increases has to be put in perspective. Until yesterday the fear of inflation in the near term was almost nil; certainly markets haven’t ignored inflation completely but the general view had been that inflation wouldn’t increase to meet the Fed’s target of 2.5% until sometime next year. There’s little doubt of one thing out of the meeting this afternoon, there will be another $10B tapering of monthly treasury and MBS purchases. This morning should be quiet; this afternoon at 2:00 and o the end of the day’s trading will be very interesting and possibly quite volatile depending on all the information that will be released and Yellen’s press conference. The ultimate question hanging over the markets now; will the Fed signal an earlier increase in the Fed funds rate than what had been widely believed to be mid-2015….until yesterday?
Last week the MBA reported mortgage applications increased 10.3%; refinances +11% and purchases +9%. This week MBA reported applications declined 9.2%; refinance apps down 13% and purchase apps down 5%. The refinance share of mortgage activity decreased to 52% of total applications from 54%. The adjustable-rate mortgage (ARM) share of activity remained unchanged at 8% of total applications. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.36 percent from 4.34 percent, with points increasing to 0.24 from 0.16 (including the origination fee) for 80 percent loans. The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000) increased to 4.32 percent from 4.27 percent, with points decreasing to 0.09 from 0.12 (including the origination fee) for 80 percent loans. The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 4.07 percent from 4.06 percent, with points decreasing to -0.39 from -0.03 (including the origination fee) for 80 percent loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 3.50 percent from 3.43 percent, with points decreasing to 0.16 from 0.22 (including the origination fee) for 80 percent loans. Looking at the two weeks together, mortgage applications are not gaining much momentum.
In Iraq; crude oil production is being ramped up; oil exports from Iraq’s southern terminals in the Persian Gulf are poised to accelerate even as fighting plunges the country’s north into deeper turmoil. This morning reports that Iraq’s largest refinery is under attack, the refinery is in the north where all the fighting is taking place. Pres. Obama is scheduled to meet with Congressional leaders to brief them on recent events. 275 troops sent yesterday to Baghdad to protect the US embassy as fighting is coming closer to the capital. Obama is considering increased cooperation from Iran; a move that is likely to not be popular, but necessary. Iran is a Shiite country; the fighting in Iraq is led by Sunnis.
At 9:30 the DJIA opened -24, NASADAQ and S&P were unchanged on the open; the 10 at 9:30 2.63% -2 bp and 30 yr MBS price +14 bps from yesterday’s close and -7 bps from 9:30 yesterday.
Our technicals are all slightly bearish now; I am not too concerned yet but if the events this afternoon set off additional selling we would have to accept it and react accordingly. I still hold that the economy isn’t as strong as many believe and that the US stock market is poised for a strong sell-off. However, I have no idea when it will occur, just watching the technicals (market action). With interest rates at close to zero there is not many places other than equity markets that investors can go, resulting in the potential that equity markets may climb more, and the expected decline could well be pushed off for a number of months and interest rate markets not declining as we currently believe. Always go with the flow; never marry an outlook until markets confirm.