Princeton Capital Blog

Mid-Week Market Update

June 22nd, 2011

This week’s FOMC meeting has adjourned with no major surprises.

The Fed again reminded us that the economic recovery slowed recently and lowered their forecasts for the economy, but they do expect it to regain momentum in the near future.

Accordingly, they left key short-term interest rates alone and kept the reference in the post-meeting statement that key rates will remain at or near current levels for an extended period of time. They also said that their second round of quantitative easing (QE2) will wrap up this month as planned.

In a bit of good news for mortgage rates, the Fed did say that they were delaying the shedding of their assets from their balance sheet. This was a point of concern in the mortgage market because when the Fed begins selling their mortgage-related holdings, we could see the additional supply make current securities less appealing and lead to higher mortgage rates. The fact that they have clarified they are not starting to sell them doesn’t alleviate the issue, but does push it down the road somewhere.

Overall, today’s events had little impact on the markets. The initial knee-jerk reaction drove stock prices a little lower, but they have since rebounded to positive ground. The Dow is currently up 8 points while the Nasdaq is up 2 points. The bond market has given back some of its pre-adjournment gains, currently standing up only 2/32. However, I don’t see this as enough of a change to cause lenders to revise mortgage rates higher this afternoon.

I am continuing to watch the yield on the benchmark 10-year Treasury Note, currently at 2.98%. I still suspect that the market is not comfortable with it below 3.00% and think that it will move higher in the immediate future. Since mortgage rates tend to follow bond direction of bond yields, this would be bad news for the bond market and mortgage rates.

Tomorrow has two economic reports scheduled for release, neither of which is considered to be highly important. The first is last week’s unemployment figures. The Labor Department is expected to say that 413,000 new claims for unemployment benefits were filed last week. This would be little change from the previous week, indicating no change in employment sector strength. The higher the number of new claims filed, the better the news for the bond market and mortgage rates.

May’s New Home Sales will be posted by the Commerce Department late tomorrow morning. This report is similar to Tuesday’s Existing Home Sales report, but tells us how well sales of newly constructed homes were last month. It is expected to show a decline in sales from April, but will likely not have much of an impact on mortgage rates because this data tracks only 15% of all home sales.

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