China’s Tone Softens

Stocks are again climbing higher this morning as China’s Xi makes statements that defuse the ongoing trade war rhetoric. This time, he is committing to reduce existing tariffs on automobiles. Further, he is pledging to remove financial restrictions on banking and other industries in hopes of lessening the potential of a trade war between China and the US. He went so far as to compare the recent path of trade disputes to Cold War mentality.

Stock investors are hoping this is now an opportunity for the two sides to forge a path towards mutual trust. However, many economists warn that this could amount to just words from the leader of China, and that actions will need to quickly follow. As we have found in recent weeks, this issue has bounced back and forth as news continues to develop. Stocks could find themselves slumping once again in the days to come as developments arise. It will be an ongoing issue at least for the short term.

After a brief stint above their 50 day moving average, mortgage bonds are currently beneath this critical level once more. Bonds have been in a range trapped between their 25 DMA as a floor and their 50 DMA as a ceiling. As the days move on, this range has tightened and is now nearing the stage where bonds will be forced to make a decision as to which direction they will head. Since we know they are getting squeezed out to one direction or the other, we look for clues as to which is more likely. With stocks climbing sharply higher, that will add downward pressure to the bond market. Further, after the close of the markets today, bonds will experience a coupon roll-over. This is where prices are adjusted to reflect the maturing coupons. This event happens one day each month. Although it doesn’t impact our mortgage interest rate sheets, it certainly does impact the technical picture. This alone will be enough to push bonds below this support level, forcing them to have to contend with the 25 DMA as a ceiling of resistance once again. This was a difficult ceiling to break the first time, so this isn’t good news for the near term direction of mortgage interest rates.

Given the continued negative technical picture, we will maintain our locking bias.