Markets Obsessed With Quantitative Easing

The markets have been obsessing about the Fed tapering. There have been huge swings in each direction whenever the topic is in the headlines. So, Wednesday’s Fed Statement will undoubtedly create volatility. Among the many questions traders have for the Fed, some are: when will the Fed begin tapering? By how much? And will the Fed taper just Mortgage Backed Securities (MBS) or Treasuries or a mix? It’s unlikely we will get clear answers, so there will be a lot of reading between the lines to search for clues. Adding to the drama are the quarterly Fed Forecasts, which will also be a part of this meeting. The forecasts have been far from accurate in the past.

So why the obsession with tapering Quantitative Easing? A look at the chart below shows the amazing correlation between QE and the move in the Stock market. It’s no wonder why the markets are hanging on every word.

 

 



BLS February Jobs Number

Bureau of Labor Statistics released the february jobs number and 236K jobs were created, much better than the 170K expected. The unemployment number also dropped to 7.7% and Bonds are taking it on the chin down 50bps. Looking inside the numbers we see that the drop in rate is due to the significant drop in the participation rate. The chart above shows that while there are 300K less unemployed virtually all of that is because 296K people left the work force. We will leave it to you as to why people are leaving the work force but the ranks of those on disability and food stamps has exploded higher.

January Housing Starts

 

Homestead Mortgage, L.C.

January Housing Starts
After hitting a four-month high in December of 973,000 units on an annualized basis, Housing Starts dropped by 8.5% in January from December after jumping nearly 16% from November to December. The Housing Starts repor...t measures the number of residential units on which construction is begun each month. A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing.

 

 

 

 

Stocks are modestly higher and Mortgage Bonds are struggling. The President gave his State of the Union address last night and promoted policies that some in the Bond market are viewing as inflationary. Specifically, a 20% + rise in the minimum wage, bringing it to a federally mandated $9 per hour. The Bond market is always concerned with inflation, and inflation from wages is a cost that typically gets passed onto the consumer. Retail Sales were up just 0.1%, and while this was in line with expectations, it’s still lackluster. Bond prices have crashed right through the floor of support at 102.875 this morning. The next support level is at 102.375 - about 30 BP beneath present levels (see chart below). Until Stocks show signs of weakness, the trend in Mortgage Bond pricing should remain lower.

January Job Creation

Homestead Mortgage, L.C. 
January Job Creation - The Labor Department reported on February 1 that employers added 157,000 new jobs in January, below the 180,000 that was expected. As seen in the chart below, the 157,000 jobs created in January of 2013 was well below the 275,000 in January of 2012. Still convinced everything is fine and moving in the right direction?

What Signals Are We Getting From The Federal Reserve

What is the Federal Reserve trying to do with all of the comments and news conferences by the governors? Haven't we been hearing that they will continue to keep rates low into 2015? Well, knowing how the Fed works I would say that they are ...trying to soften the market and not have to look like the bad guys by putting the brakes on an already slow economy. So much for 2015 - last week the Fed meeting minutes had several dissenting and saying that rates may be low only until the end of 2013 - WHAT! After they state MULTIPLE times that 2015 was the magic date they drop this on the economy and the markets react immediately to change their positions (see chart January 3) and uncertainty is once again taking over the markets. Interest rates rose 1/4% immediately.

Third Quarter 2012 Revised GDP

Third Quarter GDP Revised Higher. From July to September, the economy grew faster than previously thought increasing from 2.7% in the second reading to 3.1% in the final GDP reading. This is the fastest growth since the fourth quarter of 2011 when the economy grew at a 4.1% rate. Gross Domestic Product is a measure of the total production and consumption of goods and services in the U.S. GDP components like consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's behavior.