After two straight days of >500 points losses on the Dow, it appears Wall Street is making a comeback. Yesterday, the Dow plunged more than 3.5 percent and while there is somewhat of a rally today, it’s still well short of yesterday’s losses. We had been talking for quite some time about how the Dow is No Rate Cuthaving a problem getting beyond the 18000 mark and now we might be looking at 17000 as a ceiling.

 

If this is a market correction it’s doing a pretty good job of it and the longer term effects are still yet to be seen but we do know that the Fed is hardly in a position to raise rates at the next round of FOMC meetings in late September. The actual date for a Fed rate increase has been a moving target so far this year. June came and went then July the Fed still sat on the sidelines. Now with the Chinese devaluing the yuan, raising rates now would further strengthen the dollar and that’s not exactly what the Fed wants right now.

The benefit for this selloff has been mortgage bonds and Treasuries. The yield on the 10-year Treasury fell briefly below 2.00 percent yesterday and closed at 1.998. Mortgage rates for real estate investors have drifted lower and if the markets continue to shed value rates should fall further still, perhaps by as much as 0.25%. Mortgage lenders have already priced in the first round of rate increases but it appears they’ve backed off somewhat with many thinking the Fed might instead wait until 2016 for any sort of rate increase. That woo would be a change in Fed policy for the year as Yellen has in fact clearly stated that markets should expect some action before year-end. At this stage, that looks unlikely now.