Tuesday, June 28, 2016

The Cost of Money

Weekly Interest Rate Recap for the week ending 6/17/16
Mortgage rates decreased throughout the week last week as concerns over Great Britain leaving the European Union mounted, and due to some extremely dovish tones coming out of the Fed Meeting on Wednesday. Mortgage rates bottomed out on Friday though, however it looks like most of that was due to profit taking in the mortgage bond versus any real news events.

Per the latest polls in Great Britain, it's looking more and more likely that Brexit will occur this Thursday the 23rd. The British populous will vote on Thursday to remain in the EU, or go independent. The concern in in the equity markets is that if Great Britain pulls out of the EU, will Germany follow?... and without it's two economic cornerstones, will the EU crumble sending Europe into recession. That line of concern has money flowing out of the equity markets, and into the safe haven of investments like the US Mortgage Bond, which subsequently sends US mortgage interest rates lower.

Propelling mortgage rates even lower was interest-rate-friendly speak coming from Janet Yellen on Wednesday. Long story short, the Fed is considerably more pessimistic about US economic growth than they have been in meetings past. They downgraded 2016, 2017, and 2018 growth estimates in GDP, as well as inflation. They also reduced their target interest rates by about half a percent from previous estimates in each of those years as well. The Fed cited lack of inflation and slowing growth in the labor markets as their reasons for leaving the Fed Funds Rate unchanged for now and seemingly the near future.

In light of the Fed Meeting and Janet Yellen's ensuing speech, I want to revisit my blog from last week. In summary, I proposed that I can't see interest rates going much higher from where they are now in the foreseeable future if for no other reason than because no Fed Chair or Member wants to be the goat for sending the US Economy back into recession. Thus, they are forced to always error on the side of relaxed monetary policy - ie. Tie goes to Not-Raising-The-Federal-Funds-Rate. The irony in the Fed's reasoning for not raising the Fed Funds Rate is the very next day the Labor Department reported Initial Jobless Claims at 277,000 - this is the 66 consecutive week jobless claims have come in under 300,000, which is the longest streak since 1973. Given this, how bad can the labor markets be? Too bad to raise interest rates .25%? Crazy...

Weekly Interest Rate Recap for the week ending 6/24/16
Well, thank you Great Britain for blowing the world’s mind.  Apparently reducing immigration in hopes of saving your identity is more important than any money you may have invested or in savings.  My favorite quote from last week came from an economics professor somewhere in London (you like that detail?  J  ) – “I just suffered a 15% pay-cut over night because of this vote”.  He is referring to the fact that the British Pound is getting CRUSHED on the international equities market.  No one wants Pounds anymore.  And what happens when demand falls?  Prices fall too.  The price of the Pound is falling compared to the rest of the world’s major currencies, therefore that economics professor is simply stating that his purchasing power has fallen to the extent that he just as well have taken a 15% pay-cut pre-vote. 

Long story short, Brexit has opened the door to a TON of uncertainty.  Equity markets hate uncertainty, and so all the money is flowing out of the world’s stock markets and into the safe-haven of US mortgage bonds.  When money flows into the mortgage bond, mortgage interest rates fall. 

I’m sure things will be fine in the long run, but at least in the short run home-buyers/those looking to refinance their mortgage can enjoy slightly lower mortgage interest rates due to Brexit.  That's all for now. Have a great week!

Happy Investing!

Today's blog courtesy of Kyle Bergquist, Guild Mortgage

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