In a front page, above the fold article this morning the Journal points out that the Fed will likely continue to taper when the FOMC meets next week (28th and 29th), the last meeting chaired by Ben Bernanke. Not much new in the article, and likely just a filler in an otherwise lack luster news weekend; but it opens the door for thought on the outlook that in the minds of a few was clouded by the Dec employment report. On the weak job growth in the Dec employment report, no one at the Fed believed the data, nor did most of the market believe it. The members of the FOMC are clearly on the same page that the economy is improving, and maybe even more rapidly than the group had thought a month ago. Is the Fed correct in its thinking, or is the economy less robust than the Fed and the majority of economists and analysts believe? Obviously time will tell; and there is reason to be concerned, Europe is barely eking along, China’s strong growth is slowing, and emerging markets struggling. Notwithstanding any of the concerns, the Fed will announce another $10B taper next week at the FOMC meeting. The Fed at this point has little choice, the Fed doesn’t believe the Dec employment data and will hold to its optimistic economic outlook. Markets generally accept the Fed’s tapering as fact, to back off now would in effect tell markets the Fed is waffling in its outlook. The stock market would succumb to a huge sell-off, the thing the Fed has made number one on in its momentary policy, driving investors into equity markets.
With the Fed set to taper again next week the bond and mortgage markets are not likely to fall further in rates; that is the conventional wisdom. Last week the bond market held well and improved (MBS prices +41 bps and the 10 yr note yield down 2 basis points). Impressive in the sense that the Fed is retreating, but the rally on the 10 yr note did find strong resistance at 2.80% (2.82% was the low). From a fundamental point, interest rates are likely to increase based on all the economic reports; technically however traders are not yet tossing in the towel. As long as the US stock market struggles we expect interest rates will remain in narrow ranges. Investors, after the roaring rally last year in equity markets, are less enthusiastic now and are adding some safety to portfolios, buying some treasuries while lightening up on equities. After all that, we continue to go with the markets, no matter how controversial that appears to be. The 10 trading below its 20 and 40 day averages, the 14 day relative strength index in bullish territory in terms of momentum, and at least 5 more models we use are slightly bullish. It is one of those conundrums; fundamentally rates are expected to increase, but presently the action in the markets is still supporting the bond and mortgage markets.
I am suggesting the float your rate until next next week as there is not much concern or news this week.
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