Sentiment on tax plan to guide mortgage rates

Do you ever wonder what the Federal Reserve talks about during their monetary policy meetings?  It’s nacho business.  Happy National Nacho Day!

It was announced earlier today that New York Federal Reserve President William Dudley will retire his position in February.  With Janet Yellen and Dudley leaving the Fed there is speculation that the philosophical tilt of the Fed could become less accommodative which is not friendly for interest rates.

What is friendly to interest rates is a weaker than expected jobs report and that is what was delivered on Friday.  The report showed only 261,000 new jobs were created in October and that wage growth was modest.  Analysts had expected 300,000 new jobs to be announced.

Mortgage rates improved moderately last week breaking a seven week trend of worsening.  Will they continue to improve?  Much will depend on the progress of the GOP tax plan which was unveiled last week.  The plan, which is not supported by the National Association of Realtors, relies heavily on deficit spending which means the US Treasury will need to issue more debt.  All else being equal a greater supply of debt means yields move higher.

Therefore, as sentient shifts in favor of the tax overhaul becoming law I expect home loan rates to worsen and vice versa.

Current Outlook: cautiously floating

Rate Update November 17, 2009

Mortgage rates are unchanged thus far this morning.  We remain cautious as the technical trading patterns in the bond market suggest we may see rates move higher in the coming days.

The market digested two economic reports this morning which showed inflationary pressure in the economy remains low.  First, the Labor Department reported that prices at the wholesale & manufacturing level of the economy (Producer Price Index) increased by a lower than expected pace in October.  Second, The Federal Reserve reported that Industrial Production and Capacity Utilization were in line with expectations in October.  These measures suggest that the economy has much more capacity to expand without placing price pressures on manufacturers.

Ordinarily tame inflation data would help mortgage rates move lower.  However, we’ve seen mortgage rates improve over the past couple weeks and it looks as though the rally may be losing steam.  We are going to maintain our locking position.

Current outlook: locking