Mortgage Mike’s Daily Rate Commentary

The stock market volatility is in full force once again this morning, with stock prices currently down sharply in early morning trading. Since this is following one of the strongest single days in recent months, that isn’t a big surprise. In fact, stock prices came within a stone’s throw of hitting their 100-day moving average, which we identified in yesterday’s update as being the next ceiling of resistance. From a technical perspective, we can lose up to 50% of the recent day’s gains and still be amid a strong drive higher. If we lose 50% of this level, we can expect prices to recover and take another jump higher. Therefore, don’t look for today’s stock slump to last.

 

Investors are awaiting today’s meeting minutes from the most recent Fed meeting to see if there is any new data released that could impact the market’s current expectation of future rate hikes. With President Trump stepping up his opposition to the “gradual hike” plan, it will be interesting to see if this deters the Fed’s path. Personally, I don’t expect to see the Fed bow down to the President, as they are sworn to not be influenced by a political agenda. We will have to see if this is in fact the case.

 

Although mortgage bonds are doing well currently, I foresee stocks turning higher once they have lost 50% of the recent gains. This will likely add downward pressure to mortgage bond pricing, which will put upward pressure on interest rates. Therefore, we will maintain a locking bias.

As expected, the stock market is wildly higher today.  After breaking back above its 200 day moving average, the technical climb higher kicked in to full speed.  We can now expect the stock market to move up towards the next ceiling of overhead resistance, which will be found at the 100 day moving average.  However, that gives stock investors a ways to go before they need to be overly concerned.  This will generate a lot of profits for stocks in the meantime.  Now that stocks are climbing higher, we can expect to see a strong headwind for mortgage bonds, as investors will choose to put their money in the stock market rather than the bond market.

 

The Federal Reserve is continuing to lessen their purchases of mortgage backed securities.  As the months go on, the amount of reinvestments the Fed is planning on making into the bond market will continue to fall.  By taking out what has been the strongest buyer in the mortgage bond market, we can expect the prices of mortgage bonds to fall until a new equilibrium is established.  This will drive mortgage interest rates even higher in the near-term.  Add to this the combined effort by the Fed of also raising short-term interest rates, and you have a perfect recipe that will lead to higher mortgage rates.

 

Given the strength of the stock market rally, we will maintain our locking bias.

Mortgage bonds are near flat on the day so far, as bond investors wait for the stock market to decide on its direction.  As expected, stocks closed above their 200 day moving average on Friday.  Since it has been years since stocks have decisively been below this critical moving average, we can anticipate stocks to climb higher in the near-term.  However, eventually there will come a day when the stock market falls below its 200 DMA.  Could that day be soon?  Although the market is showing signs of growing tired, I don’t believe the time is now.  If I am wrong, however, and stocks fall in the near-term, we will likely see mortgage interest rates improve.  Since a breakout is the exception and not the rule, we shouldn’t plan on that anytime soon.

 

In other news, Retail Sales for the month of September came in at just 0.1%, which was well below the 0.6% gain the market was anticipating.  This shortfall was widely due to lower than expected auto sales.  Since this is a critical indication of economic growth, it is concerning to see such a low report.  However, with the Christmas season around the corner, this will likely tick higher in the months to come.

 

With average mortgage interest rates now as high as they have been since 2011, consumers are having a difficult time adjusting to a 5% range mortgage.  This is helping to attribute to concerns over a slowing housing market.  A “shift” from a seller’s market into a neutral market is now underway, with expectations of a buyer’s market coming.  Now is a great time to sell.

 

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

This morning’s headlines read “US stocks rebound” as the Dow opened 300 points higher after 2 days of the biggest drops we’ve not seen since February. But now, a few hours into the trading day and most of the gains are gone. The Dow has given back around 50% of its gains this year, so a definitive break below this point and its likely a drop down to the next level last seen in July. What took 3 ½ months to gain might be given back in just 7 trading days. Today’s shift in momentum from opening higher and now moving back to the red potentially, is an indication that investors are just not sure that they like the idea of markets running more on their own without the Fed ready to subsidize any potential obstacle.

 

What has this meant for mortgage rates? At the moment, they have stopped their definitive move higher; at least for the last few days stocks have been selling off. The concern is always trying to determine if this is just a pause before the next leg higher, or could it be a reversal to rates moving lower? We will have to take our cue from the stock market direction, but the dominant trend for rates is still higher, so we will maintain a locking bias.

Mortgage bonds are higher this morning, as news of a tame Consumer Price Index (CPI) report filters through investors. Headline CPI increased by 0.1% in the month of September, which was below the 0.2% growth rate anticipated. On a year-over-year basis, the reading dropped from 2.7% down to 2.3%. However, the move lower was widely influenced by energy prices, which fell by 0.5%. The lower level of inflation should be a sign to the Federal Reserve that the continued rise in the Fed Funds rate has so far kept inflation at bay. The concern will be that rate hikes will continue until a forced slow-down in the overall economy occurs. That has President Trump criticizing the continued rate hikes, as he feels the Fed should hold off until we see inflation levels move higher.

 

After taking deep losses yesterday, the stock market is continuing to slide lower so far this morning. Currently, the S&P 500 is beneath its 200-day moving average. Since it has been years since stocks have been decisively below this level, this move is likely going to be very short lived. As a result, there is a strong likelihood that we will see stocks climb higher as the day wears on. If stocks do happen to close beneath this critical level, which I don’t believe will happen, tomorrow will be a critical day for stocks. If they start to fall from here; watch out. Stocks would be in for an ugly ride if that were to occur.

 

With stocks set to soar higher, we will maintain a locking bias.

Mortgage bonds got a nice bounce this morning, which was welcomed news following a significant drop in the price of mortgage bonds last week. This slight improvement seems to be more technical in nature rather than a sign of better days to come. When bond prices are in a strong downward trading channel, there will be points in time where we see retracements back that recover a portion of the losses before making another run lower. This feels to me to be a temporary retracement that we can only expect to see last until bond prices hit the top of the trading range. Now if they can make a break above the ceiling, it will be a different story. However, I wouldn’t count on that happening.

 

The recent move higher in mortgage interest rates and the 10-Year Treasury Note yield has led to the greatest losses in the bond market since the market experienced significant losses in 1976. Money managers are continuing to flee the longer-term fixed income market, which combined with the Fed slowing their purchases, has left the market forced to offer higher interest rates to attract investors. It’s hard to say at this point when an equilibrium will be reached where bond investors feel comfortable stepping back in. Until that happens, we can expect to see mortgage interest rates continue to climb higher.

 

We will continue to maintain a locking bias.

Mortgage bonds continue to get hammered, as mortgage interest rates take another step higher. The brutal path of the past few days has taken its toll on the mortgage market just at a point when the market is already slowing due to seasonal home buying coming to an end. At this point, it’s too early to say at what point mortgage interest rates will stabilize. Since bonds are in a territory that they have not been in for seven years, it remains difficult to predict what support levels could possibly slow this path. I’d count on things getting worse before things get better.

 

The Bureau of Labor Statistics (BLS) released their estimate of new job creations for the month of September, and surprisingly, it was a slower month than most economists predicted. With expectations set at 180,000, the report showed only 130,000 new hires. However, wage growth rose last month by 0.3%, and the labor force increased by .1%.

 

One shock to the BLS report was the Unemployment Rate, which ticked lower from 3.9% down to 3.7%. This is the lowest rate since 1969. Although this is a strong economic indicator of an expanding economy, we need to keep in mind that in 100% of the past times the Unemployment Rate hit its low point of a cycle, it was followed by a spike higher and a recession. Is 3.7 % the lowest we can expect to see?  That’s hard to say. However, when it does hit its low point, we can anticipate a spike and recession to follow.

 

We will maintain our locking bias.

We saw the largest one day move that the bond market has made in over a year yesterday. That resulted in a convincing break out of the range that mortgage rates had been in nearly all year as bonds fell hard and interest rates notched up over their 7-year highs. While it’s not unusual to see at least a bounce in the opposite direction on the following day, bonds are adding insult to injury as they look to close in the red yet again. This is likely the market positioning themselves for tomorrows always important Non-farm payroll jobs report. This is usually the single biggest market moving report of the month, and bonds look like a stumbling boxer with the bell ringing all too soon.

 

With all the recent Fed comments and their continual declining intervention, markets really have no choice but to look at the data for what it is. The ADP Employment report from Wednesday blew way past expectations, and that sets the stage that tomorrows jobs report likely doing the same. Given the overwhelming trend that interest rates are moving higher, we will maintain our locking bias.

Yesterday’s market update was on point, with the prediction that bond prices would fall happening today. Mortgage interest rates are setting new seven-year highs, surpassing the highs achieved a couple weeks ago. Since we are in waters that the bond market has not chartered for seven years, it becomes more difficult to say where pricing will find a bottom and rates will stabilize. The yield on the 10-Year Treasury Note is now at 3.16%, which is also in waters not chartered for seven years. This climb higher is helpful for the Fed, as it will widen the gap in the yield curve and give the Fed room to continue to hike short term rates.

 

ADP released their estimate of new job creations in the month of September, and it was much stronger than the market anticipated. The report showed 230,000 new jobs in September, which far surpassed estimates of 1749,000, and is the highest monthly figure reported in seven months. In addition, the prior month was revised higher by 5,000. This now sets the odds of a stronger than expected Bureau of Labor Statistics (BLS) report when it is announced this Friday.

 

Expect volatility to continue. We remain in a locking stance.

Mortgage bonds are holding their ground today, which is great news for mortgage interest rates. After hitting 7-year highs last week, rates have improved slightly. This is likely a retracement Improvement before mortgage interest rates take another step higher. This will be heavily influenced by Friday’s Bureau of Labor Statistics (BLS) report. If it shows that job growth in the month of September was stronger than expected, we can expect rates to climb immediately following the report.

 

Fed President Jerome Powell spoke today, saying that he anticipates the path of gradual rate hikes to continue. It seems clear that the Fed is committed to maintaining a reasonable level of inflation without allowing the economy to get to heated. Although the Fed has already met their 2018 goal of 3 rate hikes, the odds of one more rate hike in the month of December are relatively high. Combined with the continued reduction of the amount of bond purchases, the tightening mode is in full swing. Eventually, this will catch up to the stock market and create a headwind that will force stocks lower.

 

Although bond prices are holding, odds of significant improvement are minimal. Therefore, we will maintain a locking bias.