Hello everyone and welcome back to the Mortgage Rundown brought to you by New American Funding. Today I’m going to review what’s happened in the markets these past 12 months and my predictions for the future.
The end of 2016 saw interest rates move higher by 70bps right after around the election of a new US President. Republicans retained house and senate majority and looked to advance their agendas on tax reform, health care reform and infrastructure spending. The 10yr finished 2016 at 2.45% and as you can see on your screen it reached an all-time low in July at 1.36%.
In the 1st quarter of 2017, fears of inflation have plagued the markets with many economists calling for the Federal Reserve to raise rates 4 times this year. Core PCE has almost reached 1.9% and the unemployment rate is right around 4.7%. The Fed’s dual mandate of below 5% unemployment and 2% inflation is about to be met. As you can see on this graphic unemployment has been falling continually since 2009.
The 2nd quarter saw inflation falling at a dangerous pace and suddenly the market doesn’t believe the Fed can raise 4 times in 2017. The market believes that tax reform and health care reform are still on the table. The 10yr Treasury moved very little. It started the quarter at 2.38% and finished the quarter at 2.31%. The graph on your screen shows the change in inflation over the past five years.
The 3rd quarter brought more bad news on inflation with Core PCE and CPI below 2%. There were two FOMC meetings in Q3 but the Fed made no changes to the benchmark rate during either session. Over the quarter there was rate volatility as the 10yr fell to 2.04% before climbing all the way to 2.33% by September 30th.
The fourth quarter has begun with a more hawkish tone as there is now an 80% chance the Fed raises rates in December. Keep a close eye out for more inflation data from October.
Looking into the future, my prediction is that tax overhaul and health care overhaul will continue to stall. Inflation without an overhauled tax code will remain relatively low. The Fed’s unwinding of the balance sheet will take precedence over interest rate increases and last but not least the 10yr will remain below 3%.