The week ended with the terrific news that Existing Home Sales shot UP 9.4% in September to a 5.57 million annual rate. This was almost twice the increase the consensus expected and a nice boost coming off the slight drop we saw in August. Best of all, the inventory is now down to a 7.8 month supply, getting us closer and closer to the 6-month level of a normal housing market.
With most chart time frames in harmony, the future of interest rates will most likely follow the stock market’s lead. We’ll stick with our neutral call, keeping one eye on a stock chart and the other on MBS.
Quiet day in the making as stocks hold most of their gains and bonds, notes, and MBS hold their shade of red. Nothing huge here as the 10 year note is off 5/32’s (yield 3.24%) and mortgage backs on the 4.50% coupon are off a couple of 32’s. Earlier today, the Australian Central Bank raised interest rates .25%, giving a clear signal that their part of the world is starting to recover and that taking fiscal responsibility is the prudent course. Wonder what Bernanke is thinking?
Look at it this way, if you had 500 million or so to invest what would you do? Buy stocks after a 55% run from the bottom? Loan money to others or increase company investment, betting on a V shaped recovery? Or, buy treasuries which yield a real rate of return around 4.75%. Give me Uncle Sam’s full faith and guarantee any day or at least until there is no doubt about an economic recovery.
No change in rates, longer term inflation in check, and low level of interest rates for an extended period of time. They will also continue to buy Treasuries and MBS. Market are volatile but holding, albeit at lower levels. MBS off 9/32’s
Rumor mill bantering is talking about the Fed using “Reverse Repos” to drain dollars out of the system, taking away excess reserves. In general, this exercise is nothing new if explained in the proper context to the market. If it is labeled a policy change, the market will feel that this is the beginning of a shift in policy, one towards tightening/removal of accommodation. English translation would means higher interest rates. This kind of shift would cause forced selling in both bonds and stocks and not treat us mortgage types well. We believe it is a little too early in the recovery cycle for this type of policy change, given our current level of unemployment along with a number of other fragile components of the economy. No doubt the Fed is walking a tight rope, trying to sound confident and optimistic while still keeping the training wheels on the economy.
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