Phil Grossfield's Blog

Annual Birthday Dinner Party.  I love traditions and this is one of my favorites. My best friend’s wife, my wife, and one of my closest friends share September birthdays. So, for about 10 years we have celebrated together by having a fancy meal and excellent wine.

In years past the two hosts of this shindig were actually not September birthdays…my best friend and one of our closest friends that recently passed-away from cancer. They were the ones that started this whole thing by cooking us a ridiculously extravagant dinner coupled with off the hook wine pairings. In one year we had a professional chef come to the house and prepare dinner and in another year we went out, simply because we needed to simplify things for obvious reasons. This year however we celebrated like we did in the beginning, except that we all shared in the cooking responsibilities.

We had tuna sashimi, home-made pasta with killer pesto sauce (my friend Rob is shown in the picture above making it), bacon-wrapped scallops, sous vide salmon. My wife made chocolate fondue and I made creme brule from scratch, and I have to admit it was pretty awesome. In the end, we toasted to our missed friend, indulged obnoxiously by over-eating, over-drinking and having a fabulous time.

My Market Watch:   Bonds Up – Pricing Improved Already.  The Fannie Mae 30-year bond is treading positively again, now up +13bps on the day. It would have been more but a Chinese economic report came out regarding increased inflation…and bonds hate inflation. This has unfortunately kept bond trading tempered.  Here is my report from yesterday, in case you missed it:

The weak Jobs Report this morning will benefit us for the remainder of 2013.  First, for now rates/pricing have improved across the board, meaning both Fixed and Arm coupons. Second, and more importantly, there is a strong likelihood that any discussion of QE tapering will be pushed into 2014.

The Jobs Report came in at 148,000 new jobs when it was expected at 180,000 new jobs. Now, if you think like a trader on Wall Street then this news makes you uneasy about the stock market. Why? Because new jobs reported is an indicator of economic strength. That makes sense, right? More new jobs means things are generally better…the economy is booming. But the opposite is also true…less new jobs means a weaker economy, and this morning’s report was 31,000 less new jobs than expected…ouch! So, traders feel the economy is weaker than expected, and therefore they’d rather put their money elsewhere, like into the bond market. When traders invest in bonds, our pricing is directly affected in a positive way. This morning bond pricing jumped +40bps. This improved rates significantly across the board.

More importantly, the discussion of QE Tapering is likely pushed into 2014. Why? Because the Fed’s argument for tapering QE is based on the strength of the economy. That is, if the economy is improved, then it can withstand QE tapering.  If you recall, Quantitative Easing is the government’s monetary policy of spending billions on bonds in order to keep interest rates low and stimulate the economy. As long as bonds are being bought the price of bonds remains low and this has kept our mortgage rates low for a long long time, thank you very much! Many have argued the government is way overdue to back off QE or taper QE…meaning stop buying so many bonds. If the government tapers QE, bond prices will increase and rates with it. In fact, the mere discussion of QE tapering influences traders to sell off bonds since low rates would no longer be expected. But now we have no reason to believe QE tapering is an immediate threat. Not too long ago weak economic data pushed QE tapering to the side and then the government shut down. Now the economic reports indicate a weak economy pushing the possibility of QE tapering even lower. And, we have a new Fed Chairman coming in…and she is not a fan of QE tapering. For these reasons, I think we can expect low rates for the remainder of the year.

Looking at today, I see the bond has pushed through an important ceiling of resistance and this is a very good thing. If the bond can continue to trade above this ceiling, then naturally it turns into a floor of support. We want that to happen as much as we want the Minnesota Vikings to win…and everyone wants that!

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