Mortgage Rundown: June 1st 2017

Hello everyone and welcome back to the Mortgage
Rundown. Today we are going to talk about the Growth
Story. Since the election there has been a sense
of hope that growth in the United States will accelerate from the very lackluster pace over
the last several years. The stock market certainly has accepted this
narrative and stock indices have climbed between 7 and 10 percent since January 1st; tech heavy
NASDAQ index is up 15%. But there are cracks in this Growth Story
that’s driving the stock market higher. Did you know that 1/3 of the stock market
gains are from five companies? Or that the price of oil and other commodities
have been dropping. What about the probability of any meaningful
health care reform or tax reform in the foreseeable future? Add to all of that that interest rates are
down 25 bps since January 1st. If this pro-growth story is so certain, why
are interest rates coming down instead of going up, especially with the Fed expected
to raise rates in June. Take a look at the graph on your screen. It compares the probability of a June rate
hike versus the 10yr Treasury. Generally they should move in the same direction
but as you can see as the probability of a June hike increases, the yield on the 10yr
is dropping. That leaves us with this big divide: long
term interest rates are coming down versus stock prices and short term interest rates
continuing to climb. Now in the middle of those two is the Fed
and inflation. Inflation is the barometer of growth essentially
and the Fed is likely going to move interest rates with inflation. However this week we saw that core PCE year
over year was 1.5%. Still well below the Fed’s 2% target and
yet the market continues to price in a 90% chance of a Fed raise in June. The market is telling two very different stories. Is the market wrong? Is the Fed over-confident in the economy? Is the pro-growth story overshadowing economic
reality? All of these questions will be answered in
the next few months. In the coming weeks you should keep an eye
on the following items: 1. Friday’s Non-Farm Payrolls and employment
data 2. Inflation Data to be released the week after
next. 3. The Short Term – Long Term Interest Rate
spread. And most of all please keep an eye on headlines. Market volatility is down so headlines are
likely to move rates. If you would like a more in-depth analysis,
please visit our blog. You can find it below or click this button
here. Thanks for watching and have a great day.

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