Market Analysis

Below are comments from Larry Baer's Market Alert site regarding market activity:

Commentary: The mortgage market was roughed-up this morning by comments made by Philadelphia Fed president Charles Plosser.    Plosser, a member of the Fed's monetary policy-making committee, said earlier today that the central bank "will need to reverse course" from pushing short-term interest rates lower to bumping those same rates higher -- and he anticipates "the reversal will need to be started sooner rather than later." 

He went further to say, "If we remain overly accommodative in the face of these large relative price shocks to energy and other commodities, we will ensure that they translate into more broad-based inflation that - once ingrained in expectations - will be difficult to undo.  I believe we must and will take the appropriate steps to ensure that does not happen." 

Many mortgage investors believe that was the proverbial "shot-across-the-bow" of the capital markets - giving fair warning that a series of short-term rate hikes will likely begin before the end of the year - the first such hike probably occurring at the Federal Open Market Committee's September 16^th meeting.  Since investors tend to live in the future rather than in the present -- I believe a 25 basis-point Fed rate hike is already priced into the mortgage market.  The timing and magnitude of future hikes will be determined by the dynamics of forthcoming inflation data. 

In addition to pricing-in expectations the Fed will move to raise short-term interest rates within the next four weeks, investors have been busy making room in their portfolios for a heavy supply of new incoming debt from Uncle Sam.  Tomorrow the Treasury will set a new all-time record when they auction off $31 billion of 2-year notes.  They'll follow that event up with a nearly record setting $21 billion 5-year note auction on Thursday.  As a "warm-up' for those two events, Uncle Sam is in credit market today looking to borrow $6 billion in the form of 20-year inflation-indexed securities.  Until investors have a chance to digest and redistribute these new offerings (a process that takes a day or three) -- it will likely be difficult for mortgage interest rates to draw enough investor attention to make much headway in any effort to move to notably lower levels.