By Danny Jasper, Senior Vice President of Capital Markets

Mortgages are trading better Tuesday morning while stocks are fractionally worse as the Federal Reserve begins its two-day Federal Open Market Committee (FOMC) meeting.  The Fed is virtually certain to keep rates unchanged at Wednesday’s announcement (scheduled for 2 p.m. EST). However, recent efforts by the European Central Bank and the People’s Bank of China to bolster their own economies has helped calm fears of global weakness, which could allow the Fed to consider moving interest rates by the end of the year.

Disappointing data both overseas and on the domestic front since the last FOMC meeting in mid-September had significantly reduced investor sentiment on the likelihood of a Fed rate increase by the end of the year, helping treasury yields to rally back down to the 2% range.  With global stimulus factors in play, we could see the Fed have a renewed bullish sentiment for the U.S. economy and global economic output, bringing December back as a possible meeting for monetary policy tightening.

Keep an eye out for any bullish Fed forward guidance in the announcement (there is no press conference or Yellen speech after the official press release). If the Fed hints at lower global concerns affecting the U.S. economy, investors will likely treat that as December being back on the table, and treasury yields would likely rise as a result.

Mixed Economic Data Releases

On the U.S. economic data front Tuesday morning, we had a mixed bag of releases to digest.  Durable goods orders for September had a narrower decrease than expected on the headline level, falling 1.2% versus a -1.5% forecast.  However, excluding transportation, they were down 0.4% versus a flat reading, consistent with a drop in business sentiment for consumer demand.  Capital goods orders were worse than expectations at -0.3% versus a +0.2% increase, but shipments were higher at +0.5% vs. +0.4%.  August factory orders were also revised lower from -1.7% to -2.0%.

On these numbers, firms are dropping their third quarter GDP estimates, as Goldman Sachs dropped their expectation from +1.2% to +1.0%, and JP Morgan now is expecting only a +0.6% reading.  The first round of Q3 GDP data is scheduled for release on Thursday at 8:30 a.m. EST.

On the home price front, the S&P/Case Shiller Home Price Index showed the 20-city index rose right as forecast, up 5.1% in August.  That is good for a +0.44% increase month-over-month and +4.68% increase year-over-year.  Home prices continue to rally as inventory is still low and demand remains elevated.  Finally, consumer confidence data for October came out lower than expected at a 97.6 reading vs. a 102.6 expectation.