1/30/08 - THE FIRST SHOTS HAVE BEEN FIRED
The battle begins in earnest today. Even though the morning is young, and we know the biggest clash will be after the FOMC announcement, someone accidentally released GDP data at .6%, a five year low. Oh wait! That wasn't a mistake? The GDP figure really is that low? Huh... I guess the analysts and the bulls that shrugged off the impact the housing sector would have on the economy have something to think about.
This is another piece of evidence in the case I've been building for decreased consumer participation (can't buy houses, can't refi houses, can't sell houses, so stuck in houses, just spending money on debt--or worse). Decreased consumer participation is what will destroy this economy short term and unfortunately for the economy, a recession is generally good news for mortgage rates. Ok, all right.... The advance release of the GDP being at a five year low does not a recession make. Furthermore, though the bears have fired a powerful shot, Big Ben might drop the big one this afternoon.
That's right, you'll have to wait until 215 Eastern to see what the FOMC is going to do about this brash opening volley by the bears. The real genius would be if you could predict which way bonds will go on the heels of the announcement. Don't trust me for gosh sakes! Don't trust anyone! This market is exhibiting signs of lemmingism of late. I would not underestimate a panicked and emotional reaction to what should be logically interpretable data.
If you're a mortgage professional, or a consumer who has ever said in a public forum, on the internet or otherwise, that you hope the FED cuts rates so mortgages will go down, you've no doubt heard the lambasting that comes from people like me. So why do I abuse you so? Many reasons really, but a few important ones jump to mind.
First of all, IN GENERAL, what is stimulative to the "economy" is bad for mortgage rates. Reason: if the economy is happy, stocks are going up. If stocks are going up, traders and investors must be buying them. If they are buying stocks, they aren't buying bonds. If they aren't buying bonds, bond issuers lower the price to attract buyers. If bond prices (mortgage backed securities), go lower, then yields are higher. Higher yields on MBS's equate in exactly direct proportion to higher mortgage rates. Whew.... If you've read this far, you probably already knew all that. So what's my point.
Even Larry Kudlow won't be able to put a positive spin on this GDP number. If the FED were making a decision between a 25 pt cut and a 50 pt cut, it is now undoubtedly the latter. I'll go a step further to say a .75 cut is not out of the question this morning, and at the very least, a 50 point cut will be accompanied by strong language saying "the FED will do whatever it takes to keep this economy strong, including future rate cuts, etc..." So the first part of my point is that, if they weren't going to already, the FOMC is certainly going to announce "something" that at least they think will be stimulative to the economy. If they are right, stocks go up, and so do mortgage rates.
Another reason that a big, aggressive rate cut can hurt mortgages is the fear of inflation it can cause among bond holders. If bonds are a fixed income investment, then inflation destroys their value. Much better to have one's money in stocks during inflationary periods, so mortgage rates go up on that fear as well. The nice thing is that the market has "told" Ben and the Gang that they are not as worried about inflation as they should be. And Ben has told the markets he's not as worried as he should be either.
A panic emanates from the recent trading data. There is not one right answer here. The only way to gauge what will happen to rates in the wake of Ben's Volley will be to gauge trader's reactions. If the market is not reassured, we could see nice things happen to mortgage rates today. I think a 50 pt cut will be 100% expected after this GDP data. Our best chance at improved rates is a .25 cut, but traders may even think a 50 pt cut, depending on the accompanying policy statement, is "not enough." Any indication similar to "not enough" will be good for rates. Either way, you'll know at about 230 eastern time.
This is not one of those days I will ask you to watch stocks and bonds. The spreads between treasuries (which you can see by turning on CNN or your computer) and MBS's (which are not publically available) has been fluctuating. In fact, on Monday, treasury yields went up as MBS yields went down. Still think the 10 year sets mortgage rates? At any rate (no pun), I will post the movements of the MBS market immediately after the FED decision. So stay tuned...
And a caveat: I already told you not to trust anyone. As such, I have no advice or predictions for today. I will just be giving you the data. As always, if you want my opinion, it's fairly simple. I hope that traders realize how bad a shape we are in considering the GDP numbers and decreased consumer participation. I would think that rates can hold steady or even improve at a 50 pt FED cut. A 25 pt cut will be perceived as weak and bond prices will soar. A 75 pt cut will be "too much" for traders and fears of inflation coupled with booming stocks will send bond prices lower (and mortgage rates higher). a 50 pt cut is expected, and the market may well not know exactly how to react. We could see lots of rapid changes with that announcement, OR the market could decide it wants to wait for the rest of the important data from this week to decide if we have entered recession land or not.
You know I like to give you accurate predictions, so here's the only one I have for today: today can be volatile and the market's reaction counterintuitive. Bonds and Stocks are near unchanged in light trading, almost as if they're waiting for something.
My advice: be ready to lock, and check back here after 215pm.