The Fed rate decision this afternoon could cause a lot of volatility

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Published Date 9/18/2019

Slightly better start this morning; at 8:00 am ET10 yr yield 1.78% -3 bps. MBS prices on their open this morning +8 bps from yesterday's close. Stock indexes at 8:00 am slightly lower. Today is all about the FOMC, the Fed's quarterly forecasts and Powell's press conference all beginning at 2:00 pm.

Weekly MBA mortgage applications last week down 0.1% overall, purchases apps +6.0%, refinances -4.0%.

August housing starts and permits exploded higher than imagined or forecasts. Starts were thought to be at 1215K +4.8%, starts increased to 1364K +12.3%. Permits expected at 1300K -2.7%; permits increased to 1419K +7.0%. Single-family starts rose 4.4% to a 919,000 annualized pace, the strongest since January. Permits increased by 4.5% to 866,000, the most since July 2018. Starts of multifamily homes, a category that tends to be volatile and includes apartment buildings and condominiums, surged 32.8% to a three-month high. The report is favorable but not quite as high as they were at last year's peak. Three-month averages, due to the sometimes extreme monthly volatility evident for example in today's report, are critical when evaluating housing data and for single-family homes, they strongly confirm that a pivot higher is underway: at 888,000 and 839,000 rates for starts and permits for monthly gains of 4.1 and 2.2% respectively. Multi-unit rates also show sharp improvement including a 13.3 monthly jump in permits to a 553,000 rate.

You may've read or heard about the squeeze in the Federal Funds market yesterday, but it is not an issue for long term rates or mortgage rates. The NY Fed injected $53B into the system to offset the huge increase in repo rates. This is because the Fed recently stopped buying treasuries and MBSs. It's a momentary issue, one that causes the Fed to react but as far as longer-term rates, it isn't a concern. Corporations had to withdraw funds from money market accounts to pay for quarterly tax bills. Then on the same day, the banks and investors who bought the $78B of US Treasury notes and bonds sold by Uncle Sam last week had to settle up. Bank reserves are the lowest since 2011 according to data, so overnight lending bank to bank squeezed the repo markets.

Saudi Arabia said it would quickly restore full production following last weekend's attacks on its facilities. The Saudi energy minister said the kingdom had restored oil supplies to customers at their level before the attacks by drawing from its inventories. Saturday's attacks effectively shut 5% of global oil output. Crude increased $7.00/barrel Monday, declined $4.00 yesterday and this morning down another $1.00. President Trump has ordered Treasury to substantially increase sanctions on Iran. "I have just instructed the Secretary of the Treasury to substantially increase Sanctions on the country of Iran!"

OK, those are the headlines today, but they all take a momentary back seat to the FOMC this afternoon. Iran, however, will not fade away. The Saudis claim now they have undisputed evidence that the attacks on Saudi processing centers did emanate from Iran. More sanctions appear to be the response now but inch by inch the situation is moving closer to military responses. President Trump wants to avoid a military conflict, Congress is up in arms about who can start a military conflict, and US citizens are opposed with election concerns weighing on decisions.

At 9:30 the DJIA opened -55, NASDAQ -11, S&P -7. MBS prices +10 bps from 9:30 yesterday. 10 yr note at 9:30 1.77% -4 bps.

Expecting quiet now until this afternoon. Rates may get volatile from 2:00 pm to 3:30 pm pending on what comes from the FOMC, the Fed forecasts and Powell's press conference. We bet on a better start in the MBS markets this morning holding rate locks yesterday.

Source: TBWS

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