February 19th, 2010 10:28 AM by Lehel S.
As we all know now, the Fed raised its discount rate last night to .75% frm .50%. It was widely telegraphed, the timing of the move however wasn't expected so soon. The move signals once and for all the end of the Fed's supplying of liquidity that drove its balance sheet to record levels and the most aggressive monetary policy in its existence. In the statement accompanying the hike, the Fed made it clear it was not a tightening move and low FF rates would continue for "an extended period". Fed officials including Bernanke had made it clear in the past couple of weeks that the first move would likely be a hike in the discount rate, the rate charged to banks for borrowing at the window. Bernanke prepared investors for the move in Feb. 10 testimony to Congress, saying the discount rate would have to be raised “before long.” In the minutes of the January 26-27 Federal Open Market Committee meeting released Feb. 17, policy makers said an increase “would soon be appropriate.”
Markets were caught by surprise by the timing of the move, expecting it to come later and likely at an FOMC meeting, the next one on March 16th. It should get a lot of chatter today as to its implications; trying to build some talking points but in the end it isn't going to change the general outlook and has little to do with any change in the Fed's opinion of economic conditions. Always need a talking point and reasons to debate, but his move will not have any impact on the current economic outlook or any change in the bearish sentiment that is increasing in the bond and mortgage markets. China, Australia and a couple of other minor economies have already increased rates; the US is following and we can expect the same coming from Europe's economies. The move has no impact on what the Fed will do with the FF rate; no one should read anything into the move as to when the real direct tightening will begin. And there is no implication to be drawn as to what the Fed sees ahead for the economy.
At 8:30 the only data point today; Jan CPI. Markets were shaken yesterday with the Jan PPI jump of 1.4%, today a little relief as CPI, expected to be +0.3% was +0.2%. The core rate, expected at +0.2% was +0.1%. Prior to the data the 10 yr note was generally flat but mortgages were trading off 3/32 (.09 bp). At 9:00 the DJIA index was -13, the 10 yr note unchanged and mortgages traded -3/32 (.09 bp). At 9:30 the DJIA opened -25, the 10 yr +4/32 at 3.79% -1 BP and mortgage prices -2/32 (.06 bp) frm yesterday's close.
Last week treasury yields increased, the bellwether 10 yr note rate increased 14 basis points, mortgages last week were generally unchanged. It looks like catch up time for mortgage rates with the rates on mortgages increasing this week and so far this morning experiencing more selling while the treasury market is unchanged from yesterday's beatdown. The spread between the 10 yr note and 30 yr mortgages is likely to widen, meaning mortgage rates are likely to increase more than treasuries. With the Fed no longer supporting the MBS market, the MBS market hardly functioning, and foreclosures mounting, rates on mortgages will have to increase to try and entice investors----a very hard sell regardless of the interest rate levels.
Next up, The Tiger Show at 11:00. Has nothing to do with the financial markets but is more newsworthy than the increase in the discount rate or where mortgages are trading. Since he announced he would speak publicly (Tuesday) every talk show whether sports related or a cooking demonstration it has been all about what he will say and who will be there with him. Look for slow trading between 11:00 and 12:00 today.
Treasuries are slowly improving this morning after the strong selling yesterday; mortgages started lower but trying to claw back. Look for the 10 yr to run up to 3.92%, the highest level since last Dec. The increase in rates won't be straight up, there will be rally points but the overall direction is up for rates as we pointed out two months ago. Any chance for substantial declines in rates would need a huge market shock, and that of course can't be anticipated. Consumers holding off for lower rates will be disappointed and likely pay more for their mortgage.