Today at 11:00 AM (PST) the FOMC will release their statement regarding the current state of the economy and their policy decision on short term interest rates. In December's statement the FOMC said it "expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate". The Fed faces a difficult decision in attempting to raise rates in an environment with no inflation growth, stagnant wage growth, a declining labor force participation rate, falling energy prices and global economic declines. If the Fed raises rates too soon, without inflation/wage growth, they risk sending the economy into deflation. On the other hand, the ECB's QE decision may give the Fed more confidence in the outlook for the global economy. To get a proxy for when the Fed views as the right time for raising rates we watch for changes to the "patient" clause: "Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy". MBA Mortgage Applications fell -3.2% last week following three consecutive weeks of growth. Purchases slipped -0.1% vs. -0.6% prior (+1.0% YoY), Refinancing fell -5.1% vs. +24.2% prior (+58.4% YoY), and the average interest rate for a 30-Year conforming loan increased +3 bps to 3.83% vs. 3.80% prior (4.52% a year ago).
Treasuries continue to be elevated from last week's ECB's announcement of a 1.14 trillion Euro stimulus plan including 60 Billion Euros a month in asset purchases from March to September of next year. The Euro has been in decline for the past six months, it ended 2014 down -12% vs. the dollar for the biggest loss since 2005, and has extended those losses into this year. In response, the dollar has climbed to an 11-Year high vs. the Euro on increased demand for U.S. assets. The U.S. Dollar Index rose to the highest since September 2003 yesterday, adding to this year's 4% increase. Another factor that boosted treasuries throughout the day was the Durable Goods Orders miss which could impact the Fed's decision on short term rates. Gold gained +0.9% on the disappointing Durable Goods data. Greek bonds continue to sink lower, for a third consecutive day, following the election of the anti-austerity party Syriza. Greece's three-Year rate jumped +183 bps to 15.86% and the yield on 10-Year securities rose +69 bps to 10.16%. Crude Oil fell yesterday to $45.14 per barrel, and continues to remain low, which should stimulate consumer spending and economic growth in the short/medium term as many are paying less at the pump. Oil slid nearly 50% last year as the U.S. pumped at the fastest pace in over three 30 years. The ruble continues to slide lower after Standard & Poor downgraded Russia's bond rating to junk; Russia was lowered one step to BB+, putting it below investment grade for the first time in 10 years. The ruble lost 0.8% yesterday to 67.3570 per dollar. Moody's rating of Russian bonds remains one step above the S&P's at the lowest investment grade.
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