Stocks rallied this morning while mortgages were lower following yesterday’s hawkish delivery of the Fed’s Official Statement and Summary of Economic Projections, along with key economic data for the day.
FOMC Interest Rate Decision
They came, they saw, they hiked. As was expected, the Federal Reserve raised its benchmark rate by 25 basis points to 0.50% – 0.75%. Markets had priced in a rate increase prior to the Fed announcement; however, market reaction was sparked by the Fed’s surprisingly hawkish tone and updates in the statement and projections released. The biggest contributor was the Fed’s action to raise the “dot plot,” projecting three rate hikes in 2017 versus previous projections in September’s “dot plot,” which only indicated two hikes for 2017.
Fed Chair, Janet Yellen, failed to ease markets in her post-meeting press conference as she did not soften the Fed’s stance on projections and economic outlook. The news immediately added pressure to bond markets, causing yields to soar to highs not seen in over two years. The 10-year Treasury yield increased by 13 basis points to just above 2.60%, while the 2-year note saw a 12 basis point climb reaching 1.27%. The question looms as to whether or not the Fed will follow through with their forecast of three rate hikes for 2017 or if they will act as they did in 2016 with only one hike.
Consumer Price Index
Consumer prices remain relatively low as the Consumer Price Index (CPI), at both the headline and core level, rose only by 0.2% in November. Headline CPI is at +1.7% year-over-year, while the core (excluding food and energy) year-over-year CPI rate held steady at 2.1%. Energy continues to boost headline inflation; while at the core level, housing (rents) are maintaining inflationary pressure. Besides housing, all other components of CPI are immobile and keeping inflation relatively low; this may draw some further impact to the Fed’s decision to raise interest rates in 2017.
Jobless claims data continues to run at low levels as initial claims fell 4k in the December 10 week to 254k. The low readings point to continued strength in the labor market as the 4-week average fell in line with the previous month’s trend posting a 257.75k level. Continuing claims, in lagging data for the December 3 week, rose by 11k to 2.018 million and the unemployment rate for insured workers remained unchanged at 1.5%.
In manufacturing data news, the Philly Fed’s Business Conditions Index posted a strong 21.5 reading in December, hinting at acceleration for the factory sector. Also adding to positive news for manufacturing was this morning’s Empire State report where general conditions remain positive at 9.0 for December. Both reports help add strength and optimism for the sector as new orders remain positive and price data appears to be picking up.
Also of importance is this morning’s Housing Market Index, which ends 2016 on a strong note, posting a sharp 7-point increase to 70.00. Future sales for the index were the highlight, up 9 points and suggesting strength in tomorrow’s housing permits data. Current sales were up 7 points, which were also a strong signal for new home sales. Despite the recent surge in mortgage rates, home sales continue to move at a positive steady pace, hinting that participants are now more inclined to enter the market to avoid further mortgage rate volatility.
Castle & Cooke Mortgage, LLC® (NMLS #1251) is a leading independent mortgage lender headquartered in Draper, Utah, with locations across the United States.