Daily Commentary by Larry Baer: One
down and one to go.
As I mentioned in yesterday's commentary the
most mortgage interest rate friendly scenario this week will include a
"strings-attached" approval from the German court and a decision by
the Federal Open Market Committee to hold off on QE3 while simultaneously
extending its conditional pledge to keep interest rates low through late
2014. Should these two scenarios play
out -- it will be difficult for inflation expectations to rise -- which in turn
provides solid support for the continuing prospects for steady to perhaps
fractionally lower mortgage interest rates on Main
Street, USA. I'm not saying this combination of events
will occur - I'm just saying these combined scenarios will probably prove to be
the most mortgage interest rate friendly outcome we could expect.
Earlier this morning Germany's
Constitutional Court
gave a green light for the country to ratify the euro zone's new bailout fund
and budget pact, but with "strings attached." The most prominent of the "strings
attached" provisions mandates the German parliament have veto powers over
any future size of the fund. This
eagerly awaited verdict boosted global stock prices at the expense of slightly
higher rates here at home as investors withdrew funds from the safety of
Treasury debt obligations and agency eligible mortgage-backed securities and
redeployed the capital into riskier but higher yielding assets classes.
The members of the Federal Reserve's Open
Market Committee began a two-day meeting this morning to hash out monetary
policy strategy for the next six weeks.
Economists polled by Reuters see the odds of the Fed launching a third
bond purchase program this week at 65%, up from 60% last month, as the central
bank grapples with a stubbornly highly national unemployment rate and generally
lethargic economic growth. Two rounds of
bond purchases totaling $2.3 trillion have failed to lift the economy clear of
the gravitational pull of the Great Recession (2007 - 2009) and some analysts
question why the Fed believes throwing additional money at the problem will
make a substantial change this time around.
Keep you fingers crossed that the Fed chooses
to hold off on QE3 while simultaneously extending its conditional pledge to
keep interest rates low through late 2014.
Anything else will begin to put some serious upward pressure on mortgage
rates.
Should the Fed choose to turn on the printing
presses to create enough cash to fund a $500 billion+ bond and mortgage-backed
security spending spree - mortgage interest rates will begin to tick higher --
not lower. More money in the economy
chasing the same amount of goods and services increases the price of those
goods and services - a phenomenon commonly known as inflation. The good news is that inflation, at least in
the early stages, tends to improve peoples view of forward looking economic
growth. The anticipation of rising asset
values created by improving economic momentum tends to lead people to pull
money out of super-safe investments like Treasury debt obligations and
mortgage-backed securities, and put that money into riskier assets like
stocks. Be aware that history confirms
these two processes create higher - not lower mortgage interest rates. Mortgage rates rose following QE1 in 2007 and
QE2 in 2010. Mortgage interest rates
only began to move lower after the government spending spree came to an end at
the conclusion of each program.
Forewarned is forearmed.
Speaking of mortgage rates - earlier today
the Mortgage Bankers of America released their Mortgage Application Survey for
the week ended September 7th.
The mortgage application composite index (a measure of both purchase and
refinance loan demand) rose for the first time in six weeks, posting a gain of
11.1%. The refinance component of the
index gained nearly 12% versus the prior week, while loan requests for purchase
money mortgages climbed by 8%. Refinance
applications accounted for roughly 80% of all applications taken during the
survey period and represent 77.4% of the prospective loan demand.
The contract rate for 30-year fixed rate
conforming mortgages fell by 3 basis points to 3.75%. The interest rate is down 1 basis-point from
four weeks ago and 54 basis-points lower from the year-ago mark.
THE
MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
