Market Update 7-16

A generally quiet day in market activity. Markets are likely to sit somewhat still through the day today ahead of the beginning of Bernanke’s testimony tomorrow at the House Financial Services Committee; Thursday he moves to the Senate Banking Committee. The obvious topic is what is he thinking now about beginning the end of the QEs? Generally most all market participants are expecting the Fed to start tapering soon, the question is when? Most of the talk has been centered on September for the first cut in the $85B of monthly purchases; some think a cut of $20B a month. Bernanke has been going back and forth with his comments since June 19th at his press conference that shot interest rates higher when he said the Fed was ready to start pulling back because the economy was improving and the labor market was gaining momentum. Then after the bond market spiked and likely surprised him, is next speech he back-peddled somewhat; saying the employment situation wasn’t as good as the data was implying. Low wages and part-time workers count as employed but won’t as much to consumer spending; also the percentage of would be wage earners is the lowest on record---only 63% of working age people are actually in the labor markets.

After running up to 2.73% the 10 yr has come back about 20 basis points in rate and mortgage rates have eased a little. The markets are still technically bearish; the 10 yr needs to close below 2.50% and it is getting close at 2.54%, we still haven’t seen a lot of new buying just short-covering that has pushed rates down. The bond market has been led around by Bernanke and other Fed officials coming out with conflicting comments. It isn’t clear now how low the 10 yr and mortgage rates can fall but the more macro outlook remains the same, the lows in mortgage rates are unlikely to been seen again. As long as the economic outlook continues to improve demand for low yield fixed income investments will lag. One factor that helps is that inflation is not a factor in the present outlook.

Have your ducks in line to make a move.  The next two days of meetings will be closely monitored and Bernanke's comments will have the ability to shift the market in either direction.  Be prepared to capitalize on any gains and minimize any loss in rate.  Stay in contact with your mortgage originator to make sure you end up on the right side of the fence.

- Michael Corboy