This week does have some relevant economic data scheduled for release, including a highly important consumer spending report. However, after today’s unexpected Fed announcement, it is hard to believe the markets will have any interest in that data. There is no doubt that this week will be as active as the past couple, if not more.
Let’s start with what happened today as it is so much more relevant to rates than the economic releases scheduled this week. In a surprise move (simply because their regularly scheduled FOMC meeting is only a couple days away), the Fed announced several actions they were taking in an effort to offset the expected negative impact the coronavirus will have on the economy. Some of what they announced was widely expected to come later this week, while there was still much debate about others. The fact they did it today instead of the FOMC meeting signals there is great concern about how badly the economy will suffer and immediate action was needed. They likely also wanted to help stabilize the financial markets at the same time.
The Fed announced they were making another emergency cut to key short-term interest rates today. After lowering the Federal Funds rate a half point earlier this month, they cut it by another full point today, bringing it down to 0.00%. The last time it was dropped to this level was 2008 in response to the financial meltdown. They also announced that they would be purchasing $700 billion in securities over the coming months. $500 billion of that is targeted at buying Treasuries and $200 billion will be used to buy mortgage bonds (MBS), adding a heavy dose of liquidity to those markets that should help keep bond yields and mortgage pricing lower. Furthermore, they will be allowing proceeds from current holdings to be reinvested into those same markets and also made other moves to help stabilize the financial system.
The immediate reaction to the news is extremely positive for mortgage rates. Stock futures are capping out at limited losses, meaning stocks are expected to open down sharply tomorrow with a likelihood of tripping the "circuit breaker" that halts trading for 15 minutes at certain loss levels. Bonds are currently rallying during overnight trading with the benchmark 10-year Treasury Note yield currently at 0.66%, down from Friday’s close of 0.95%. While this appears to be great news for mortgage rates, it should be kept in mind that the mortgage market has not played well recently, breaking long-established patterns of moving with Treasuries yields. It has been a difficult week for rates, so hopefully tonight’s gains will carry into tomorrow so we can get some relief from the recent upward move.
NOTE: It is important to remember that the Fed does NOT change mortgage rates. There is a common misconception that when the Fed lowers rates, they are pushing mortgage rates lower for borrowers. The Fed’s move will cause banks to lower their Prime Rate, which directly affects interest rates on credit cards, home equity loans/lines of credit, car loans and business loans. However, it does not directly affect residential purchase and refinance loan rates! We will likely see a favorable reaction to today’s Fed announcement in tomorrow’s rates, but that is because the move signals great concern about the direction of the U.S. and global economies. It is not because the Fed lowered mortgage rates to 0%. Bonds and mortgage securities are more attractive to investors in times of weaker economic conditions. Therefore, the fact the Federal Reserve is so worried about the economy that they needed to take the drastic action they did, should cause funds to move into bonds and mortgage rates to move lower tomorrow.
To summarize this week’s economic data, the biggest release will come Tuesday morning when January's Retail Sales data is posted. It is normally considered to be a highly important report because it tracks consumer spending, which makes up over two-thirds of the U.S. economy. As we saw over the past couple weeks, the markets haven’t been too interested in the economic news. This is likely to change the next two months when those reports cover March and April. That is when the coronavirus crisis was in full swing.
The other reports include Industrial Production, Housing Starts, Leading Economic Indicators and Existing Home Sales. None of them are considered to be highly important, meaning they probably will not have an influence on rates with everything else going on in the markets. The FOMC meeting that was scheduled for mid-week was held today before the Fed made their announcement.
Overall, it is a safe bet to label tomorrow as the most important day of the week for rates, but we could also see multiple days with significant movement in the financial and mortgage markets. Rates should start the week with an improvement tomorrow. After that, it would be prudent to keep a close eye on the markets if still floating an interest rate as the markets can become quite volatile at any time.