Current position: Floating
Stocks and mortgage bonds are both lower ahead of the all-important Fed meeting today. Bonds are being pressured lower by some news out of the UK, where core inflation in the month of February rose by 1.2%. The BOE and ECB are well behind the US as far as where their central bank rates are, with the BOE at 4% and the ECB at 3.5%, even after they just hiked 50bp.
Fed Meeting
The Fed's two-day meeting concludes today, with their statement released at 2:00 p.m. ET, followed by the press conference at 2:30. The big question is whether the Fed will hike, cut, or pause.
The Fed Futures are showing an 86% chance of a 25bp rate hike, while some former Fed Presidents are showing support for a pause.
Both former Dallas Fed President Kaplan and former Boston Fed President Rosengren said they would support a pause to see what the fallout will truly be from the banking crisis.
The Fed is still concerned with inflation, even though it has been and will continue to go down. Even though it's too high right now, there is clear disinflation coming. Shelter costs are lagging and propping up inflation by 2.2%. And when that catches up, you will see big moves lower.
The Fed may realize this, which is why they have recently started to closely track the "Super Core", which strips out food, energy, and shelter costs. But looking at the last three months, the annual run rate is at 2.1%! Additionally, producer prices have been coming down sharply, and the run rate on those is also 2.1%.
Although we feel the Fed should pause or even cut rates, they may hike 25bp and signal a pause thereafter. At this meeting, the Fed will release its dot plot and projections. They may hike and then signal a pause going forward or move up when they anticipate hiking.
The markets will be hanging on every word, trying to see the Fed's plan from here, as well as their thoughts on inflation. Stay tuned; it will likely be a volatile afternoon.
Mortgage Applications
The MBA released their mortgage application data for last week, showing that purchases rose 2% last week after rising 7% in the previous report. Purchases are now down 36% year over year.
Interest rates decreased from 6.75% to 6.5%, which is 2% higher than this time last year when rates were 4.5%. Refinances rose 5% for the second week in a row and are now down 68% year over year.
Technical Analysis
Mortgage bonds continue to vacillate and have broken beneath support at the 100-day moving average, which will now act as resistance. Bonds have a lot of room to the downside before reaching the next floor at the 25-day moving average. While technical analysis is always important, the Fed meeting today will take precedence and dictate the market direction. Begin the day floating.
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