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Third Quarter GDP Growth Was the Strongest in 2 Years

December 5, 2016

 

The latest data on gross domestic product (GDP) growth all but ensures the Federal Reserve will raise the federal funds rate in December. The Commerce Department reported that GDP grew 3.2% in the third quarter to post the strongest quarterly growth in two years.

The Commerce Department goes on to report that U.S. corporate profits increased for the third-consecutive quarter in the third quarter. Net profits rose 3.5% to $1.7 trillion on an annualized rate in the third quarter compared with the second quarter. Compared with a year ago, net profits rose 5.2%, the strongest annual reading since the fourth quarter of 2012.

With positive economic news to further bolster confidence, traders in federal funds rate futures contracts now price a 94% chance the Fed will raise the fed funds rate at its Dec. 14 meeting. Most everyone (including us) side with the traders. The recent trend in interest rates reflects the consensus expectation.

That said, don’t be surprised that interest rates pulled back recently. Markets are forward-looking processes. Market participants “buy” into anticipation and “sell” into reality. Mortgage rates have been bid up over the past three weeks as most market participants expect higher interest rates. The higher rates are here today (no more anticipation), so market participants have bid down rates (though only slightly).

With expectations that economic growth will accelerate under a Trump administration, we don’t expect to see the pullback in mortgage rates that occurred after the Fed raised the fed funds rate last year. To be sure, predicting mortgage rates is akin to predicting the flight path of a butterfly. That said, a 4% quote holding until Trump takes office in January is entirely reasonable.

The pullback in mortgage rates this week, along with more subdued action in stock,currency, and credit markets, hints at a top in mortgage rates. How much lower rates could drift is impossible to know, especially over a short time frame, but our instincts and experience lead us to believe a lock would be prudent.

But not everyone concurs. More risk-accepting borrowers might consider a stop-loss rate – perhaps an eighth of a percentage point higher than the spot-market quote. Just be sure that borrowers who claim to be more risk accepting really are.  

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