Mortgage Mike’s Daily Rate Commentary

Mortgage bonds continue to show strength, holding their position just beneath a critical ceiling of resistance that has held mortgage interest rates back from making further improvements for months.  Considering stock prices continue to climb, this is outside of the behavior we would typically expect.  Since stocks and bonds both compete for the same investment dollars, we generally see bond prices fall when stocks rise.  With the bond market showing strong technical signals, it will be interesting to watch and see if prices can break above resistance.  Keep in mind that breakouts are the exception and not the rule.  For now, we need to play the odds. Remember that the past six times bond prices have reached this level, it was immediately followed by a sell-off.  If history repeats itself, rates will soon have upward pressure.


With today being another slow day for scheduled economic reports, markets will trade heavily based on the technical outlook.  Stocks are once again at record high levels, which could add upward pressure to mortgage interest rates as the day wears on.  With mortgage bonds at a critical level, we can expect bond prices to break in one way or the other in the near term.


We will maintain a locking bias.

After working their way to the bottom of their trading pattern, mortgage bonds are now heading higher and will soon hit the top.  From there, we can expect bond prices to be pushed lower, as bonds have not been above this critical level for months.  Unless there is a significant reason for prices to break this level, we will continue to trade within this range.  A longer term look at both mortgage bonds and the 10-Year Treasury Note yield charts show that there is more reason to be concerned about prices breaking beneath the floor than there is hope prices will break above the ceiling  This is just the current reality, and one which we should be grateful that prices maintain stability within a tight range.


Stocks start the day in the red.  There hasn’t been any significant economic reports so far today to drive the markets lower, so this is just a technical move.  If the stock market experiences at least a temporary retreat, mortgage bonds will benefit.  However, given the current path of stocks, I wouldn’t expect the strength in the market to slow until it has a more drastic reason.  Therefore, I don’t anticipate mortgage interest rates making significant improvements in the near term.


We will maintain a locking bias.

It’s another day in paradise for stock investors today with stocks once again setting new all-time record highs.  The formal signing on the initial phase one trade agreement has put many investor’s concerns of a trade war on hold.  This is contributing to the overall strength of the stock market.  With trade concerns, it will be interesting to see how stocks respond going forward.  There has been such hype over the anticipation of yesterday’s event.  It seems to me that we will soon once again see the trade war dominate the headlines, with stocks falling during times of concern and climbing when good news regarding continued progress is released.


One key index that has been a historic predictor of future health of the US economy is the Cass Freight Index.  As consumers purchase goods, they need to be shipped to retailers and consumers via land, sea and air.  This index measures the number of shipments, which generally reflects the consumer demand for goods.  When this number is negative, it indicated business is slowing and can be an early sign that things are turning in the economy.  Compared to December 2018, shipments this last December were down 7.8%, showing the steepest decline since the Great Recession of 2008-2009.  We need to watch this number closely going forward.


We will maintain a locking bias.

Mortgage bonds have cycled back up to the top of their trading range, which is a ceiling of resistance that has held mortgage interest rates back from improving since last October.  Prices have made many attempts in recent weeks to surpass this seemingly unformidable ceiling, only to be pushed lower.  If prices happen to muster the strength to break this ceiling, they would be approaching multi-year lows in mortgage interest rate pricing.  However, the difference between where rates are now and the multi-year lows we saw last summer isn’t enough for most to justify taking the “wait and see” approach.  Rates are incredible right now.


The US and China are expected to sign their phase one trade deal today, which has stock investors again driving stock prices higher.  I think stocks are now at a vulnerable point, at least in the near term.  I believe they are due for a short-term rest, which could happen after the hype surrounding the initial trade deal dies down.  That would generally be good news for mortgage interest rates and could offer the support needed to maintain rates where they are right now a bit longer.


Given the ceiling that remains, we will maintain our locking bias.

Mortgage bonds continue to hold their ground, even under the intense pressure created by a strong stock market.  The Dow Jones is up again this morning, a headwind for the bond market and a force driving interest rates up.  Stock prices seem to be in an over bought position, meaning we should be seeing a pull-back in the near term.  This would be good news for mortgage interest rates.  However, history shows that a pull back in stocks would be a short term event.  Betting against stocks in the longer term is a more difficult prediction to make.  Until the US economy shows stronger signs of slowing, or unless the geo-political risks heat up, stock prices will continue to rise.


This morning’s Consumer Price Index (CPI) report, which measures inflation on the consumer level, showed an increase of 0.2% in the month of December.  Although this would point to an average of strong 2.4% annualized rate, because it was below the 0.3% gain anticipated, the bond market reacted positively to the news.  Since consumer inflation is one of the most significant drivers of mortgage interest rates, as long as we see tame levels of inflation, we can expect to see mortgage rates hold in the current range.


Unless mortgage bonds have the strength to break above the current ceiling, we will maintain our locking bias.

After hitting up against the strong ceiling of resistance that has held mortgage interest rates back from making further improvements, bond prices are now falling lower.  At this point, we can expect to see bond prices work their way down to the floor of support, meaning that interest rates are now as good as they will be in the short term.  The current ceiling has been in place for months. Considering stock prices continue to set new record highs, mortgage interest rates have been exceptionally low in this strong stock market environment.


Despite multiple indicators pointing towards a pullback in the market, many economists now believe that the US will escape a recession.  Although I believe that the Fed taking action to both cut interest rates as well as to stimulate the markets with additional quantitative easing will push back the date of a recession, I don’t believe that a recession will be avoided all-together.  I think by 2021 or 2022, we will see a see negative growth in the US economy for at least two consecutive quarters, which is how a recession is defined.  I believe we will see a continued slowing in 2020, but not a recession until sometime after the election.  I believe that the next presidential term will face some significant economic challenges.  For now, let’s all enjoy our continued prosperity.


We will maintain a locking bias.

The Bureau of Labor Statistics (BLS) released their estimate of new job creations for the month of December, showing that 145,000 new hires.  This is just beneath the market’s expectations of 158,000, so the impact so far on the bond market has been muted.  As expected, retail jobs made up a strong percentage of the gains, so we can expect many of the seasonal jobs that were created to be cut sometime in the first quarter of this year.  Also, the overall average hourly earning rate came in low, which could also have been influenced by the number of lower paying seasonal jobs created to support the holiday consumer demands.  In fact, the pace of wage growth was the slowest rise since mid-2018.


The wage growth figure contained within the report is truly one of the most important measures of the future of the US economy.  Ultimately, consumer spending is what drives the pace of the economy.  As income growth slows and consumer debt continues to climb, there comes a time when consumers experience debt-fatigue where they become resentful of the debt they have accumulated and desire to eliminate it.  With home values climbing, many will choose to consolidate their debt into their home loans so they can maintain the same level of spending that got them into debt.  However, others will choose to focus on paying their debt down.  However, if their incomes don’t rise at a pace that allows them to make progress on their debt, they are forced to make lifestyle changes to live within their means.  This causes an economic slowdown and the cycle moves into a recessionary environment.


With stocks still climbing, we will maintain a locking bias.

Stocks are climbing higher once again, setting new all-time high records. The strength of the stock market seems to directly correlate with the size of the Federal Reserve’s balance sheet, which has been climbing higher as well. As the Fed injects money into short term T-Bills, this is acting as a tailwind to help keep stock prices higher. However, the current path of Fed investments is set to end in March. Will this cause a pull back in the stock market?  I believe that if the Fed does not extend the current plan, we will see stocks pull back. Many believe that the Fed will have no choice but to extend the current form of “Quantitative Easing” without causing a major disruption in the overnight lending market.  This will be an important story to follow, as it will certainly impact the path of mortgage interest rates in the longer term.


Tomorrow is the Bureau of Labor Statistics’ (BLS) report that will show the estimates for new job creations in the month of December. Given that the ADP estimate was well above the market’s expectations, there is great risk for a strong headline number. Since a strong headline number would not be a welcomed sign to the mortgage bond market, we would see upward pressure on interest rates if job creation numbers are high. The deeper question will be the types of jobs created. However, that is less important to a world that seems to value the number of jobs created over the types of jobs. We need to see more higher paid jobs vs the lower pay offered through retail and customer service positions.


Given the ongoing strength of the stock market, we will maintain a locking bias.

Last night’s Iranian attack on a two Iraqi bases that house US troops certainly put markets in a panic.  At one point, the yield on the 10-Year Treasury Note plummeted 10 basis points and the Dow Jones was down 400 points as investors feared a US military attack in Iran.  However, as news of a more level-headed approach from President Trump hit the wires, the stock market came roaring back and yields on the 10-Year shot higher.  Since this morning’s Presidential address, stocks have blasted to new all-time high records and mortgage interest rates have moved higher.  If the tensions between the US and Iran settle, we can expect upward pressure on mortgage interest rates.  However, if tensions again heat up, we can expect the opposite.


This morning’s ADP report showed that there were 202,000 new jobs created in the month of December, which was better than the 157,000 expected.  Adding to the strength of the report, November’s numbers increased by an additional 57,000.  We will receive the more important Bureau of Labor Statistics (BLS) report on Friday.  That will provide the details showing from what industries the job gains are allocated.  I expect much of them to come from the retail sector, as stores added staff to keep up with the holiday shopping demands.


Given the strength of the stock market, we maintain a locking bias.

Mortgage bonds remain trading near the top of a channel with a very strong ceiling of resistance that has kept interest rates from making improvements below current levels.  With investors watching closely the developments surrounding increasing tensions between the United States and Iran, we could see an eventual “flight to quality” where investors sell stock holdings in mass and move into the safety of the bond market.  With signs now pointing towards a retaliatory response from Iran, I see this as probable in the weeks or months to come.


Tomorrow we will receive the first of two estimates of new job creations in the month of December, with ADP set to release their report tomorrow morning.  Although this is considered an important report, Friday’s Bureau of Labor Statistics (BLS) report holds precedence.  Markets are anticipating about 160,000 new hires, which to me seems a bit optimistic.  Although I could be wrong, I believe that higher paying job growth could have been weaker in the month of December.  We will update further on this after tomorrow’s ADP results are reported.


Unless bonds are able to break the strong ceiling of resistance, we will maintain a locking bias.