Minneapolis Fed President Kocherlakota in a WSJ column today warning the Fed should not increase the Fed funds rate this year with the 2.0% inflation target so far away. One of his premises is that doing it now with no inflation may send a message to markets that the Fed has lowered its 2.0% target set back in 2012. The Fed’s own internal outlook is 2.0% won’t be met until 2020. He said the outlook does not justify for policy tightening and may bring the Fed’s overall credibility into question. He suggests the Fed cut the rate for banks parking money at the Fed, forcing banks to turn more to lending. That idea was floated over the last few sessions, negative interest rates at the short end. Some believe it helped Europe when the ECB charged banks to park money at the central bank. According the Kocherlakota if investors begin to believe the Fed is lowering its 2.0% inflation target mortgage rates would increase, slowing an already slow sector in the feeble recovery. Kocherlakota is a voter on the FMOC this year. He said monetary policy itself poses the biggest danger to the economy.
MBA released weekly mortgage applications this morning. Apps increased 3.6% overall, re-finances led the way, up 7.0% frm the previous week but purchases declined 1.0% frm the previous week. The previous week purchases were down 4.0%. Last week MBA reported July purchases were down 4.0% for the months compared to June. The refinance share of mortgage activity increased to 55.5 percent of total applications from 53.1 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 6.9 percent of total applications. The FHA share of total applications decreased to 12.9 percent from 13.3 percent the week prior. The VA share of total applications decreased to 11.1 percent from 11.3 percent the week prior. The USDA share of total applications increased to 0.8 percent from 0.7 percent the week prior. Data on housing has been a mixed picture recently; yesterday single family housing starts in July jumped 12.8%.
At 9:30 the DJIA opened down 126 points, NASDAQ -26, S&P -12. The 10 yr note ahead of the FOMC minutes this afternoon +2.bp to 2.22%, 30 yr MBS price -13 bps frm yesterday’s close and unchanged from 9:30 yesterday when prices were set.
FOMC minutes hit at 2:00 this afternoon frm the July meeting. What message will be gleaned about a Sept rate increase? Markets presently see Sept as a toss-up but private economists see Sept as the date the Fed will do it. As a former trader I would suggest going with markets and ignore economists. Economists over a long period of comparing reality with their outlook have about a 35% success rate. The minutes could provide an update on the Fed’s internal debate about the inflation outlook, a key factor in their looming decision on interest rates. The minutes are three weeks old, in that time China de-valued its currency, oil and commodity prices have continued to decline, job growth has improved but job quality and wage increases are still a serious concern for Janet Yellen. As we noted her favorite wage gauge is the employment cost index. The ECI increased by 0.2% in the second quarter. That was not only way below what Wall Street was expecting, it was also the slowest pace of wage growth since 1982 when ECI record keeping started.
As we have noted, our technical work has gone frm bullish to now just neutral. This afternoon’s reaction to FOMC minutes is key, the bellwether 10 yr at 2.21% is breaching a downtrend line and all of the momentum oscillators we monitor have lost all bullishness. Not yet bearish but at critical pivotal levels. Looking only at the underlying fundaments we don’t see a reason interest rates will increase much if our work would turn bearish. No inflation, a very weak stock market now, China slowing and will take the world with it. The dollar while stable now will increase on any belief rates are about to be increased taking the US economic outlook weaker.
PRICES @ 10:00 AM
10 yr note: -6/32 (18 bp) 2.22% +2 bp
5 yr note: -4/32 (12 bp) 1.60% +3 bp
2 Yr note: -1/32 (3 bp) 0.74% +1 bp
30 yr bond: -13/32 (41 bp) 2.88% +2 bp
Libor Rates: 1 mo 0.202%; 3 mo 0.332%; 6 mo 0.529%; 1 yr 0.844%
30 yr FNMA 3.5 Sept: @9:30 103.31 -13 bp (-2 bp frm 9:30 yesterday)
15 yr FNMA 3.0: @9:30 103.40 -14 bp (+4 bp frm 9:30 yesterday)
30 yr GNMA 3.5 Sept: @9:30 103.70 -8 bp (-3 bp frm 9:30 yesterday)
Dollar/Yen: 124.42 +0.01 yen
Dollar/Euro: $1.1028 +$0.0004 (unchanged)
Gold: $1122.40 +$5.50
Crude Oil: $42.13 -$0.49
DJIA: 17,380.76 -130.58
NASDAQ: 5029.14 -30.21
S&P 500: 2083.04 -13.88