25 Feb Cautious float
A reversal in the direction of oil prices helped the stock market make a late day rally to end the day in the black yesterday. This caused mortgage bonds to experience the “whip saw” effect we discussed earlier in the week; driving bond prices down to once again the floor of support in the sideways channel they are currently trading. The relationship between the stock market and oil prices has been parallel in recent weeks; with stock prices moving in the same direction as oil prices. The level of co-dependency is viewed as unhealthy by many economists and stock traders. However, it has certainly made predicting movements in the stock market much easier.
Initial Jobless Claims for the week ending 2/20/16 were reported this morning to be 272,000. This was 10,000 higher than last week’s reported claims, and slightly worse than the 270,000 anticipated by the market. Overall, the number of people filing for first time Unemployment Benefits has stabilized in the 260-270k range for quite some time.
Durable Goods Orders, which measure new orders placed with domestic manufacturers of hard goods, was reported to be up 4.9%. This was better than the 2.0% anticipated, and significantly stronger than the -4.6% reported last month. When the transportation component is excluded, orders were up 1.8%, which was better than expected. Since this number is moving higher, we need to watch future reports closely. Although good for the US economy, a trend higher would be bad for mortgage interest rates.
After testing the floor, bond prices are moving higher. As long as they stay above support, we can have a floating bias to give bonds the opportunity to move towards the top of the channel. However, if bonds break beneath the floor, or if they climb to the top and pricing is improved as a result, we will switch to a locking bias.