Russia’s annexation of Crimea
- Russia slapped sanctions on nine Americans forbidding them from entering Russia.
- Stocks are higher and Mortgage Bonds are also just a bit higher so far this morning. The situation in Crimea continues to develop. President Vladimir Putin signed a treaty allowing the annexation of Crimea into Russia.
- Putin also gave an important speech this morning where he first laid out some history about Crimea and said that it was Russian to begin with and it was wrong for Khrushchev to give Crimea to Ukraine back in 1954. He said that he has no intention of splitting Ukraine and don’t believe those who say we need more than Crimea. These comments calmed the markets, but can Putin really be trusted?
- Crimea has valuable seaports and airports for both military and trade purposes. And although it’s a scary comparison, Nazi Germany made some similar claims about not having ambitions for further conquests. The situation there remains fluid to say the least.
Yellen Shakes Markets – Here’s What’s Next
Stocks are higher and Mortgage Bonds are lower so far this morning. Initial Jobless Claims were released for the week ending March 15th, and Claims increased 5k to 320k from last week’s unrevised figure of 320k. This was stronger than estimates of 325k, and another very good reading. Claims have been trending lower which is encouraging for the economy. These Claims results for the week of the 12th are factored into the models for employment figures next month. It remains to be seen whether these low Claims figures will translate into real job growth.
Yesterday was the conclusion of the 2 day Fed Meeting, and the Fed continued to taper, as expected. They reduced QE3 by another $10B, bringing the total reductions to $30B off of the $85B during QE3. The reduction was split evenly between MBS and Treasuries, taking the Fed’s monthly purchases from $65B to $55B, which is $30B in Treasuries and $25B in MBS. In the policy statement, the Fed did remove the “well below” 6 ½% Unemployment Rate target before they would hike rates. The market did not react well to this because it leaves the decision to hike more in the discretion of the Fed as opposed to a specific target. Additionally, in her first Press Conference following the Fed Meeting, Janet Yellen shocked the markets when asked how long it would be before the Fed would begin to raise the Fed Funds Rate after QE ended. Her response was “probably something on the order of around six months, that type of thing.” Both the Stock and Bond markets sold off on the comment. So when will the Fed hike rates? We know that as of now, the Fed is only reducing QE at Fed Meetings, and by $10B…and that there is $55B left. Let’s take a look at the schedule (the asterisks mean there is a press conference to follow):
If the Fed continues to taper by $10B, that would leave the Fed with a decision at the October 29th Fed Meeting. At that time they will have $15B left in QE. They could decide to taper $15B, or if they remain at $10B, will have to cut the remaining $5B at the December 17th Meeting. According to Janet Yellen, that would mean rate hikes could come as soon as April 2015, or possibly June 2015. In either case, it would mean approximately somewhere near mid spring or late spring of 2015 for the first Fed rate hike. There’s a lot of time until then, and the Fed can change their mind, but that’s what they are looking at as of now.
Going along with Janet Yellen’s comment is the famous Dots chart. We have brought this up many times in the past, and it shows where Fed Members expect the Fed Funds Rate to be in the future. Let’s take a look at the most recent one. Each dot represents a Fed Member’s expectation for where the Fed Funds Rate will be. In 2014, all but one Fed Member sees rates as remaining the same. In 2015, all but 2 see the Fed Funds rate being higher. By 2016 everyone sees it higher.
Rates will be moving up, and it depends how the Stock market metabolizes the rate hikes. Without inflation, rate hikes are going to be a deflationary move. As far as Mortgage rates go, there is clearly a lot more pressure on the shorter end of the curve.
Leading Indicators and the Philadelphia Fed Manufacturing Survey both came in stronger than expected. This helped the Stock market turn positive and push Mortgage Bonds lower.
Existing Home Sales for February were reported down 0.4%. This was in line with expectations and a decent report. All of the regions did better, expect for the Northeast, where weather was a problem. Median Home Prices were reported at $189,000, up 9.1% year over year. The supply of homes increased to a 5.5 month supply.
Yesterday’s big drop in Mortgage Bonds was capped support at 103.61. Bond prices are following through to the downside today and have broken beneath this support level. Prices could continue to drop to test their 61.8% Fibonacci Retracement level at 103.13, another 40bp beneath current levels. We are going to recommend continuing our locking bias.
Listen in today to hear more on how Russia and Janet Yellen’s first Fed Meedting effects our economy..
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