As we begin this short week I am mindful of the Veteran’s day holiday yesterday. My dad was a WW-II vet serving in the Navy at Iwo Jima. My son is currently active duty and served in Iraq as a Combat Medic. I am grateful to all of the men and women that have served or are currently serving our country. I cannot imagine our country or our lives without their sacrifice.
Mortgage rates have once again been rising for more than a week. The largest jump for the week was on Friday due to the better than expected employment report. Non Farm Payroll jobs in October jumped up to 204,000, following a revised increase of 163,000 for September. The consensus prior to the release of the report was for an increase of only 120,000. This far better than expected report has traders focusing on the idea that with an improving employment picture, this may prompt the Fed to begin tapering the stimulus program sooner than later.
After the strong employment data for October there has been a swing in thinking that the Fed may start tapering at the Dec 17th and 18th FOMC meeting. Prior to Friday the consensus among economists was no tapering until next March. Now Dec is in play, at least for the moment.
There is still a lot of uncertainty though as to when the Fed will actually begin pulling back on buying bonds, which they have been buying at the rate of $85 billion per month for some time now. For traders it appears that the timing is not as important as the fact that there will be tapering. By the time the Fed actually begins pulling the trigger, markets will have already discounted any tapering; the Fed in a sense will be authenticating what markets had already priced.
We have been seeing mortgage rates in a range of 4.5% to 5% for the past 60 days. I think that as we continue to see growing strength in employment, that there is a good chance that we may be seeing an upward tick in that range soon to a range from about 4.625% to 5.25%.
Take a look at this chart of bond prices to see the dramatic volatility in the bond market on Friday. The green vertical bars indicate days that bonds that drive mortgage rates improved. The red bars indicate a deterioration in bonds and rates.
The long red bar on the right shows the market last Friday. You can see by the size of the bar that the movement in the bond market was pretty dramatic compared to the other days on the chart, and the fact that the bar is red is clearly not a good sign.
This indicates to me that we need to be aware of the opportunity that is still available to get a phenomenally good mortgage interest rate. If you know of anyone that could improve their mortgage rate or buy a home, but is waiting for rates to get back down in the mid to low 3% range, I think you would be doing them a favor to encourage them to get off the fence and take action.
Many believe the Fed will not make a decision on stimulus tapering on the basis of only one monthly employment report, however the job market is a big factor in the Fed’s decision making process. Investors are fearful that if another strong report follows for November the Fed would take action early 2014 or even as soon as next month. Investors and traders cannot wait until the Fed makes a move so they are already starting to change their holdings and bond positions to minimize losses on their portfolios.
The unemployment rate ticked up .1% to 7.3 percent after dipping to 7.2 percent in September. The forecast was for a 7.3 percent unemployment rate so this part of the report came as no surprise. Once again the irony that exists is that hiring jumped but the unemployment rate also increased. This is simply because fewer people are looking for work.
The other report that also has bond holders spooked about the Fed tapering the stimulus program sooner than later is the GDP report. GDP increased for the 3rd quarter 2.8% which is much higher than analysts were expecting.
This week is very light as far as market impacting reports:
- Monday November 11th – Veterans Day – Markets Open, Banks Closed
- Wednesday November 13th – MBA Purchase Applications and 10 Year Note Auction
- Thursday November 14th – First Time Jobless Claims
- Friday November 15th – Industrial Production
I hope you have a great week. Let me know if there is anyway I can serve you and anyone you care about.
Don’t forget to thank a Veteran this week!