Stocks are higher as we await the Fed decision at 2:00 pm. Bonds and MBS are up.
Fed-whisperer Nick Timaros of the WSJ discussed what to look for in the Fed decision today. While no increase is expected at this meeting, the big question will be the dot plot for this year and next. Timaros believes it is possible that the dot plot will still predict one more rate hike this year, however fewer members will lean that way.
It is easier for the Fed to signal one more rate hike and fail to deliver than it would be for the Fed to send the all-clear signal and then raise rates. The other big question will be how many rate cuts the dot plot signals for next year. The dot plot from June is below:
The June plot sees one more rate hike this year, and then about 100 basis points in cuts in 2024.
Mortgage Applications rose 5.4% last week as purchases 2% and refis increased 15%. “Mortgage applications increased last week, despite the 30-year fixed mortgage rate edging back up to 7.31 percent – its highest level in four weeks,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications increased for conventional and FHA loans over the week but remained 26 percent lower than the same week a year ago, as homebuyers continue to face higher rates and limited for-sale inventory, which have made purchase conditions more challenging. Refinance applications also increased last week but are still almost 30 percent lower than the same week last year.”
Separately, Joel Kan expects mortgage rates to fall into the 6% range by the end of the year and into the 5% range in 2024. I agree with him and I believe the driver is going to be a decline in interest rate volatility which will positively impact MBS spreads. Below is a chart of the Bank of America / ICE bond market volatility index (MOVE) and you can see it jumped in early 2022 which coincided with the Fed’s liftoff. Uncertainty over Fed policy is a driver of volatility, and volatility is probably the biggest driver of MBS prices as it drives convexity forecasts.
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