Morning Report: Awaiting the Fed

Vital Statistics:

  Last Change
S&P futures 4,629 -1.2
Oil (WTI) 70.12 -0.68
10 year government bond yield   1.46%
30 year fixed rate mortgage   3.31%

Stocks are flattish as we await the FOMC decision at 2:00 pm today. Bonds and MBS are flat.

 

The market doesn’t anticipate any changes in interest rate policy, however the expectations is that the Fed will step up the pace of tapering, with an eye to wrap up the process by March in order to clear the decks for rate hikes later in 2022.

The Fed Funds futures are predicting 3 rate hikes next year:

 

Retail Sales rose 0.3% in November, which was way below the 0.8% Street estimate. Gasoline spending increased, while motor vehicles fell. Discretionary spending (electronics, department stores) fell.

 

Mortgage Applications fell 4% last week as purchases rose 1% and refis fell 6%. “Fewer homeowners have a strong incentive to refinance at current rates,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase activity increased slightly, as a 1.7 percent rise in conventional applications offset a 1.6 percent decline in applications for government loans. The strength in conventional purchase activity continues to support higher loan balances, which moved back over $400,000. Housing demand remains strong as the year comes to an end amidst tight inventory and steep home-price growth.”

Below is a chart of the MBA refinance index over the past 10 years. We are still pretty elevated compared to pre-COVID history.

 

Homebuilder sentiment remained strong in December, according to the NAHB Housing Market Index. Housing starts have been gradually increasing, however shortages of labor, lots, and materials remain.

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