It's not just your average Hump Day when the Fed is set to announce their interest rate decision. Yesterday the Case-Schiller Home Price index came in lower than expected at 4.9% vs. 5.6% expected. This isn't a huge factor in bond pricing. The bigger factor yesterday was that traders were taking some chips off the table in advance of today's Fed Interest Rate Decision, especially since the RSI was extremely overbought.
This morning, Pending Home Sales came in at -1.8 vs. expectations of +1.0%. Here is one analyst's take on this: "The miss is due to very tight inventory and higher prices which is a good problem to have as it is not due to a pull back in demand." This statement is a bit funny to me because while inventory is tight, there is no data that tells us why it's tight: maybe people just don't want to move so there's no reason to sell their house or perhaps people see the market moving higher so they are waiting a bit to get more out of their house (which is another issue because they are just going to pay more for the house they will buy after they sell theirs - unless they have the ability to buy now AND hold on to their current home). The other part of this statement that is even more non-sensical is where he says it's due to higher prices and not necessarily a pullback in demand. I think that most of us understand the pricing cycle and that prices go up to a point where people are no longer willing to pay that price and they stop buying, or it slows significantly. This point is the tipping point. Have we reached it yet? who knows. If there were more inventory there would be more competition and prices would probably be a bit lower so that more people would probably be buying. It's simple economics. The point is that the higher prices might be the exact cause as to why pending home sales are down and there is a pull back in demand. If more inventory comes to market, we may see home prices decrease a bit and sales tick up.
Anyway, the big news for today going forward is the Fed Interest Rate Decision. No one expects the Fed to raise rates today but what everyone, especially bond traders, is looking for is a clue as to when they will raise rates. The popular belief among economists is that the Fed will probably start raising rates in September. It appears that an increasing number of bond investors are thinking it may not happen until later this year or possibly 2016. The Fed Raises rates to slow growth in the economy so that it doesn't get overheated and lead to high inflation. Commodity prices are extremely low and that means that the goods produced from these commodities will have a lower cost. Additionally, the cost of shipping these goods will also be lower with the low cost of oil. With low costs, inflation will remain low and the Fed won't have a reason to raise rates. The Fed also doesn't want to raise rates if economic growth is still tenuous. All of the angst and drama from the curiosity will end around 2:15 EDT this afternoon. For now, the FNMA benchmark bond is down 15 basis points after being down 9 basis points yesterday. The RSI is still overbought but it's right at the threshold instead of significantly above it like it was Monday afternoon and early yesterday morning. More significantly, the GNMA (FHA and VA) is down 31 basis points. You can lock before the Fed interest rate announcement if you want to be safe. My guess, and I could be totally wrong, is that we won't get a whole lot of meat on the bond from the announcement this afternoon and traders will still be guessing as to when they will raise rates and we'll probably see a bit of buying after the announcement which will push bond prices higher and rates a bit lower.
I'll try to post an update later this afternoon on my facebook page but it won't be until mid to late afternoon. If you want to see what happened with the decision, check out The Wunderli Team facebook page. For now, make it a great day and feel free to call me if I can help with anything mortgage-related - 702-812-1214.