Mortgage Mike’s Daily Rate Commentary

Mortgage bonds broke beneath a critical floor of support provided by the 100 day moving average.  This is a highly destructive sign for mortgage interest rates, as it is a moving average that mortgage bonds have not been beneath since late 2018.  Given the significance of this, if bonds don’t quickly recover, we can expect to see mortgage interest rates continue to climb higher.  However, since breakouts are the exception and not the rule, there is still hope that bonds will recover.  Much will depend upon the stock market as it has been very strong.  As stocks approach all-time high levels, we may see stocks find a reason to fall.  If stocks continue to climb, hold on to your hat.  Rates are going up even more.

 

Today is a slow day for scheduled economic reports.  The news will heat up as the week progresses, highlighted by several reports on the strength of the housing market.  Given the strength, but overall conflicting reports, we can expect to see strong numbers reported.  This could also hurt mortgage interest rates.

 

There is tremendous risk in floating.  We will maintain a locking bias.

Mortgage bonds are in dangerous territory in early morning trading, as they flirt will falling beneath the floor that has prevented mortgage rates from taking a step higher. Bases on the micro-pattern that has developed over the past 5 days, bond prices are pointing towards losing this battle.  However, prices haven’t yet broken beneath their 100 day moving average during the entire 2019 year. Therefore, a move beneath this strong floor of support would be both unusual and will spell trouble for the near term direction of mortgage interest rates.

 

An update on China GDP was released this morning, showing the pace of growth in the struggling country slowed to a rate not seen since the early 1990’s. Considering this is a slower pace of growth than they experienced during the great world recession of 2008, this is concerning for global economic health. Of course, tariffs haven’t been helping and will likely cause further damage as time goes on.

 

There is little economic news scheduled to be released today, so markets will trade heavily based on the technical picture. At this point, the only good thing about the technical outlook is the hope that the 100 day moving average will hold.  Given its strength, I suspect it will. However, watch the stock market closely. If stocks catch another run higher, bond prices could lose the battle.

 

Floating is extremely dangerous right now.  Although the 100 DMA should hold, there is no guarantee. Float only if you are closely watching the markets and are ready to lock immediately.

It’s more of the same for mortgage bonds, with stock prices continuing their path towards their all-time high records and mortgage bonds bouncing from the floor of support up to the ceiling of resistance. However, the channel in which mortgage bonds are trading is narrowing and bonds will soon be forced to decide one way or the other. Generally, when bonds make a break to one direction or the other, the move is exaggerated, and we see prices change quickly. At this point, it’s too early to say which direction bonds will move. If stocks continue to climb, we will likely see bond prices fall and mortgage interest rates move higher. However, if stocks begin to struggle, the opposite will likely occur.

 

Economic news of the day was mostly bond friendly. Most importantly, was the housing starts report that was well below expectations. However, the report was offset by a stronger than expected building permits report which showed more applications for permits than the market anticipated. It’s hard to have a clear understanding of where the housing market will be heading when we receive conflicting information.

 

With mortgage bonds still trapped within a tight range, there is great risk in floating. I am hopeful that bond prices have found their short-term bottom. However, there is no way to say for sure. So, we can hope for the best and be prepared for the worse. Only float if you can closely watch the markets and are willing to take a little risk.

Mortgage bonds remain trapped within the same trading range, bouncing between their 100 day and 50 day moving averages. If bonds remain within this range, they will be subject to high volatility and can range from one spectrum to the other within a short time. Currently, the market is moving toward the top of the trading channel. Eventually, bonds will be forced to decide on which path to choose. With stock prices just beneath all-time high levels, we can expect stocks to weaken as they approach this critical level. When that happens, we will likely see mortgage bonds be the beneficiary and hopefully it will help prices break above the ceiling so we can see interest rate pricing reduce even further.

 

In yesterday’s market update, we talked about the slowing number of shipments eventually taking a toll on Retail Sales. This morning’s Retail Sales report showed a decrease of .3% for the month. This is well below a .3% increase that the market was anticipating. This points towards a slowdown in consumer spending, which is not good news for the strength of the US economy. If consumers aren’t buying at the same pace, GDP will certainly be impacted. Therefore, we need to watch this number closely going forward.

 

If bonds remain trapped in the narrow trading range, there is no benefit to floating. Unless you’re willing to take a risk of waiting to see which direction bonds will break, locking is prudent.

Sometimes the most interesting insights come from places you’d never expect. A bit ago I had an Uber driver who was also a retired truck driver. Although he is retired, his sons are still active and, in the business, daily. Throughout his trucking career, there were many recessions. He said that he could always predict when they were coming based on the number of trucks parked at rest stops. When the economy is thriving, it was often hard to find a spot to park in. Right now, however, he has heard that there are many open parking places, which indicates an economic slowdown. As basic as this is, he may be onto something.

 

Yesterday, the September Cass Freight shipment index was down on a year over year basis for the tenth month in a row. With weakness shown across most modes of transportation, this is a forward indicator of what is to come. When consumers are planning fewer purchases, retailers ship in fewer products. This will directly impact GDP, which is the strongest indicator of consumer financial and economic health. Some predict that the slower shipments will create a negative GDP in the 4th quarter reports. With a recession being defined as two consecutive quarters of negative growth, this would be a big concern.

 

After mortgage bond prices took a big hit the last two weeks, bonds are showing signs of stabilizing. They are now sitting in between their 100-day moving average as a floor and their 25 DMA as a ceiling. If bond prices can make a break higher, we will see interest rate pricing improve. However, anything can happen at this point. Therefore, be very careful if you choose to float your interest rate.

Stocks are in rally mode once again this morning, as investors remain hopeful that a partial-deal trade agreement will be announced between the U.S. and China. If a deal is made, it would come just days before a huge tariff is to come into play against goods being imported into the U.S. from China.

 

The key point to remember here is that President Trump has clearly stated in the past that no partial deal would be negotiated. So, if this does come to fruition, it seems valid to question President Trump’s change of heart. Personally, I believe that Trump knows the damage that the tariffs would create on the already fragile U.S. economy. Therefore, he is doing his best to avoid the tariffs from hitting the market.  Some also speculate that it is also partially due to the intense impeachment pressure the Democrats are putting on their party to push the process. Either way, it seems to weaken the negotiation process if President Trump does in fact soften.

 

Stocks have now recovered most of the losses they incurred over the past couple of weeks and will again be within striking distance of challenging all-time high levels. This has taken its toll on the bond market, driving mortgage interest rates higher along the way. I suspect things will get worse for interest rates before they get better. If a partial deal is not negotiated, we will likely see mortgage rates quickly improve. However, if the rumors in Washington are true, rates will move higher.

 

We will maintain our locking bias.

The newly formed downward trading channel in the bond market remains firmly in place this morning, pushing bond prices beneath their 50-day moving average. With the 25 DMA just beneath current levels, we need to hold here. Otherwise, we will see mortgage interest rates quickly take a step higher. Given the strength of the stock market today, chances of this support breaking are high. The stock market’s strength is being fueled by renewed optimism surrounding the trade war with China. With important trade meeting happening today, we should expect to see the optimism continue. This is not good news for the near-term direction of mortgage interest rates.

 

This morning’s Consumer Price Index report showed that after stripping out the volatile food and energy prices, the annual pace of Core inflation remained steady at 2.4%. This matches the highest level in 11 years and is not good news for bond holders. Since inflation is the arch enemy of the bond market, it is the most important factor that influences mortgage interest rates. Higher inflation will lead to higher interest rates.

 

There is hope of a “mini deal” being negotiated with China today. I believe that now is an opportune time for China to negotiate a deal with President Trump. As talks of impeachment heat up, I’m confident that President Trump will be needing some wins to help keep his base loyal. A trade deal would be great for the stock market, which seems to be how Trump measures economic success. This will not be good for mortgage interest rates, so we need to be on guard.

 

Given the continued weakness in the bond market, we will maintain our locking bias.

The ceiling of resistance in bond prices continued to prevent mortgage interest rates from improving. With prices falling once again this morning, the nice upward trading channel that bonds have enjoyed for the past couple of weeks has now been breached and a new downward channel is starting to form. With both the 50- and 25-day moving averages not too far beneath current levels, I am hopeful that prices will stabilize and prevent mortgage interest rates from taking too much of a price increase. Much will depend upon the stock market, which is now celebrating good news on the trade war with China. It’s laughable at this point how sentiment can reverse course so often, and how investors play into the drama. For now, we’ll wait until the next round of bad news hits.

 

Meeting Minutes from the most recent Federal Reserve FOMC Meeting we’re released today. As expected, the Fed members are not in alignment. Many still believe there are no economic concerns and rates should not be lowered. However, this was a consensus back in 2007, when the Fed epically missed predicting the largest recession since the 1930’s. I believe the Fed will continue to drop rates, regardless of what some nay-sayers believe.

 

For now, bond prices remain beneath a critical ceiling. Until that ceiling is penetrated, we will maintain a locking bias.

Stocks are falling once again this morning, as investors are concerned that a trade war agreement with China is not coming anytime soon. This is just another example of the back and forth whiplash that the markets have experienced over recent months. Of course, it won’t be long before the investors are once again excited about the prospects of hope for an agreement with China.

 

The Producer Price Index (PPI) report showed that inflation on the manufacturing side remained tame last month, with the annual pace of manufacturing inflation dropping from 1.8% down to 1.4%. This is a good sign for the longer-term direction of mortgage interest rates, which are heavily influenced by inflation levels. Tomorrow we will receive an update on consumer inflation via the Consumer Price Index (CPI) report. If this also shows a low level of inflation in the markets, the Fed will have a clear path to continue lowering short term interest rates. Over time, this will pressure mortgage interest rates lower, which will help provide stability to the housing market.

 

With mortgage bond prices remaining beneath significant ceilings of resistance, we will maintain a locking bias.

Mortgage bonds have continued to climb higher, clawing their way back within striking distance of three year low mortgage interest rates.  The strong upward trading channel is now reaching a point to where it is going to face a significant ceiling of resistance, meaning that we could see the improving interest rate trend come to an abrupt end in the near term.  The good news is that we have seen such a nice improvement to mortgage interest rates in the most recent weeks that those who waited to refi when rates moved higher once again have an opportunity to jump in.

 

Today is a slow day for economic reports, so markets will trade heavily based on the technical picture.  Given the strong ceilings that bond prices are facing, the technical outlook is looking to sour.  This week we will get an update on consumer inflation via the Consumer Price Index (CPI) report.  Last month the reading showed a 2.4% annual pace of consumer inflation, which is well above the Fed’s target rate of 2%.  If this month’s report is once again strong, we can expect to see mortgage bond prices move lower, which will push mortgage interest rates higher once again.  However, if the report is tame, this could give bond prices the boost needed for interest rates to improve even more.

 

With bond prices now at a strong ceiling of resistance, we will switch to a locking bias.