Morning Report: The Fed awaits 1/25/16

Stocks are lower this morning on lower oil prices and weaker overseas markets. Bonds and MBS are up small.

Not much data this morning, although we do get some important real estate data this week with the FHFA House Price Index and Case-Shiller on Tuesday, new home sales on Wednesday, and pending home sales on Thursday. We will also get the first estimate of fourth quarter GDP on Friday, with the consensus estimate at 0.8%. While this is a dramatic slowdown from the third quarter, a recession in the US is probably not in the cards (Bank of America is handicapping a 20% chance of a recession next year). Remember the old market saw: stocks have predicted 12 of the last 5 recessions..

The main event of this week is the FOMC meeting on Tuesday and Wednesday. The general consensus is that the Fed isn’t going to hike rates at this meeting. Given the turbulence in the markets lately people are beginning to think the March meeting isn’t a definite hike either. Ever since the Fed hiked rates in December, the two year bond yield has dropped by 24 basis point to 0.86%. If you take a look at the chart below, it plots the Fed Funds rate versus mortgage rates. While there is a correlation, over the past 50 years or so, mortgage rates have risen or fallen with Fed Fund, but at a much slower rate. In fact, during the last tightening cycle, mortgage rates barely moved, although there could be some bubble effects happening as well.

Morgan Stanley is bullish on Treasuries, while Goldman is bearish. Goldman is looking for a 2% – 2.3%  range on the 10 year, while Morgan Stanley is thinking 1.55% – 1.75%. The difference of opinion revolves around oil prices and their impact.

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