Mortgage Mike’s Daily Rate Commentary

Stocks are climbing higher today, while mortgage bonds continue to get squeezed between their 25 and 50 day moving averages.  I anticipate we will see a break out of the tight trading range either today or early on Monday.  As mentioned yesterday, we see a strong likelihood that the break will be to the downside, which isn’t good news for mortgage interest rates.  Also keep in mind that because there are two channels that happen to collide at the same time, the breakout in either direction will likely be exaggerated.  This means we will likely see a stronger move down once the channel is broken.  This makes now an opportune time to secure a rate.

 

Next week we will get an updated reading on the Fed’s favorite gauge of inflation, the Personal Consumption Expenditures report.  If we see consumer inflation numbers tick higher, we can expect to see mortgage interest rates move higher in response.  Inflation is the arch enemy of mortgage bonds.  As inflation ticks higher, it erodes the returns made to investors.  So to make up the losses, they demand higher interest rates to maintain the same real rate of return.

 

With bonds nearing a potential negative breakout, we will maintain a locking bias.

Trade tensions waned following Monday’s threat made by President Trump against China.  The markets seem to react to news quickly and then forget shortly after.  As a result of this phenomenon, stocks across the globe have rebounded and replenished some of their losses accumulated over the past couple of days.

 

Mortgage bonds lost their battle over the 50 day moving average this morning, which is not a good sign for the near term direction of interest rates.  With the 25 DMA just below current levels, it will be important for bonds to remain above this key trend line.  If they fall, which I anticipate they will, there will be plenty of room for bonds to fall.

 

Federal Reserve Chairman Jerome Powell restated his case for continuing to raise interest rates to help keep the US economy on a growth path.  Within his comments he referenced the strong labor market, rising inflation and strong support from his colleges within the central bank.  This means we could see an additional two rate hikes before the end of 2018, which is one higher than the market has been anticipating.  The key will be to watch the spread between the two and ten year treasury markets.  If longer term rates don’t rise, the Fed will likely be forced to hold off on the additional hike, as that could narrow the margin between the two rates as an indication of an imminent recession.

Chances of a trade war between the US and China escalated again yesterday, with President Trump threatening another $200 billion tariff. This extreme move was again met by further threats of retaliation from China.  If this battle continues, we should see mortgage interest rates improve over time. However, it will take significant strength in the mortgage bond market for prices to break above their 100 day moving average. That’s where the real improvements can be realized.
Although stocks are down sharply, mortgage bonds are receiving only a minimal benefit. They have at least temporarily broken above their 50 day moving average. With the 100 DMA just above current levels, bonds aren’t able to sustain a rally.
Given the continued lack of progress in the bond market, we will maintain our locking bias.

Friday’s announcement of $50 billion in potential tariffs on China was quickly countered by a potential $38 billion tariff against goods being exported from the US into China.  The retaliatory mindset on both sides is once again sparking fears of a trade war.  As a result, US stocks are down sharply this morning.  Ordinarily, this would be of great help to the mortgage bond  market.  However, bonds remain trapped beneath a significant ceiling of resistance provided by the 50 day moving average, which has been a difficult ceiling to remain above since last September.  Therefore, mortgage interest rate improvements will likely be minimal.

The mortgage bond market’s failure to break above its 50 day moving average points to continued weakness that could drive mortgage interest rates higher in the days to come.  The key to lower rates could rest in the hands of a trade war.  As much as I would like to see the US avoid a trade war with China, it seems to be heading in that direction.  That would hurt the US stock market and should help improve mortgage interest rates.  However, that could be many months in the future before we see that level of change.

Given the continued weakness in the bond market, a locking bias is the prudent stance to take.

Mortgage bonds are performing just as we anticipated, making short term improvements. However, they are now nearly up against their 50 day moving average, which has been a very difficult moving average to cross. I anticipate that bonds will hit this level and be pushed back down.  However, if bonds do possess the strength to break above this critical level (which I don’t believe they will), we will see rates improve.  The odds of a break through are low, so I wouldn’t take the chance of floating.

 

President Trump announced a new 25% tariff against China on $50 billion of Chinese Goods. This is once again creating fear of a trade war, which would contribute to additional weakness within the US stock market.  If China retaliates, as I expect they will, we will see the situation escalate.  In the end, China will likely be forced to comply with President Trump’s terms, or at least be forced to meet somewhere in the middle. A trade war isn’t healthy for either of the two powerhouse economies, so we will have to watch this story closely as news develops.

 

Given the fierce battle that will likely take place at the 50 day moving average, a locking bias remains prudent.

Yesterday was a big day for central banks around the world, starting with the Federal Reserve right here at home.  As expected, the Fed did raise interest rates by ¼%.  However, the surprise came in the announcement following the rate hike that said the Fed now expects a total of 4 rate hikes in 2018.  This is one more than the three the market has been expecting, and could set the stage for increased volatility in the future.  The market seems a little unsure as to whether or not it agrees with the news.  There is currently only a 50% chance of this happening already priced into the market.  If investors begin to drive that percentage higher, we could see mortgage rates move higher to price in the additional Fed rate hike.

 

Secondly, the European Central Bank (ECB) announced that it would soon be stopping its version of Quantitative Easing, as it now sees the European economy as being able to continue to grow without the additional help.  This is a strong statement and clear sign that the world economy is growing.  With both the US and the EU on a path of higher interest rates and stronger inflation, we should continue to see mortgage interest rates continue to tick higher over time.

 

Retail Sales came in much stronger than expected, increasing the chances of 2nd quarter GDP exceeding what the market has been anticipating.  With Retail Sales being a primary indicator of consumer economic strength, the 0.8% growth rate last month is a clear sign that our economy is advancing at a rapid pace.

 

We are truly fortunate that mortgage rates haven’t increased over the past couple of days.  We could see rates slightly improve today and then weaken in the near term.  We will maintain our locking bias.

Mortgage bonds are holding steady so far this morning, as investors await the highly anticipated Fed announcement on interest rates that is due out at 12:00 p.m. mountain time.  The Fed will be raising the Fed Funds rate by another ¼%, which the market is already anticipating.  Therefore, the impact of the announcement should already be priced into the markets.  The key concern will be the tone of Fed President Jerome Powell in his interview following the increase.  With inflation moving higher, the labor market tightening and the overall economy growing at a fast pace, the worry will be for unexpected moves the Fed could take to help slow the growth.  That could impact mortgage rate pricing if the statement is more aggressive than expected.

The Producer Price Index (PPI) once again showed a stronger than anticipated increase, with the Headline number now pacing at an annual growth rate of 3.1%.  This is much stronger than the 2.6% rate reported last month.  When subtracting food and energy prices, the annualized rate grew from 2.3% up to 2.4%.  Although this doesn’t necessarily translate to higher consumer inflation, it is a leading indicator as to the overall costs that will eventually be passed down to the end consumer.  As manufacturing prices move higher, you can expect consumer prices to maintain pace in the long run.

Given the potential volatility associated with today’s Fed announcement, the safe play will be to maintain a locking bias.

Yesterday’s historic meeting between the United States President and the Leader of North Korea was one that few would have imagined possible.  When you consider that just a few short months ago, President Trump and Kim Jung Un were exchanging threats of nuclear war and rhetoric of destroying life as we know it, this is clearly a major victory in favor of peace between the two nations.  Although far from over, there appears to be a positive relationship developing between the two leaders that could bring mutual benefits to each of our countries.  As far as how this relates to our financial markets, stocks will certainly like this news, and the headwind against the bond market could continue to strengthen.

 

We received news that consumer inflation is indeed gaining steam, with the Headline Consumer Price Index (CPI) annualized rate now pacing at 2.8%.  This is up from the 2.5% reading in April.  When stripping out food and energy prices, the Core rate is currently pacing at a 2.2% rate, which is up from the 2.1% reported in April.

 

With the Fed meeting underway today, the Fed will announce their interest rate decision tomorrow at noon Mountain time.  Given today’s report showing that consumer inflation is pacing at a 6 year high, we are almost certain to see another ¼% rate hike announced.

 

We can anticipate an increased level of volatility.  With little potential benefit of meaningful improvements to interest rates in the near term, we will maintain our locking bias.

Today begins an important week for the financial markets, and really for the future of our country.  Most importantly, tomorrow is the day President Trump is scheduled to meet with Kim Jung Un, the leader of North Korea.  Just a few months ago, tensions between the USA and North Korea were so high that many predicted an imminent military battle.  Of course that fear caused stock markets to fall and mortgage interest rates benefited as money flowed out of stocks and into the bond market.  Now, we are seeing this trend reverse.  The prospects of peace between the two powerhouse nations are now high, which means the financial markets are moving the other way, which is not good for mortgage rates.

Tomorrow is the first day of the Federal Reserve’s two day meeting, after which the Fed will announce another ¼% rate hike.  I personally think that the Fed will have a more difficult time with the next planned rate lock of 2018.  Unless longer term interest rates take a step higher, the narrow spread between short and long term rates could tighten even further.  Since this is a predictor of a pending recession, a failure of longer term rates rising will cause the Fed to hesitate.  It will be something worth closely monitoring.

Mortgage bond prices remain in a downward trend.  We will maintain our locking bias.

After breaking above their 25 day moving average yesterday, mortgage bonds are now trapped in a tight trading range between the 25 and 50 day moving averages. Since the 50 DMA is a strong ceiling, the path of least resistance seems to be for bond prices to move lower. That could add headwind to mortgage interest rates as the day wears on.

 

Next week is a significant one for mortgage bonds, highlighted by the Fed announcement on Wednesday.  The Fed will raise interest rates by 1/4%, which will be the second time rates have increased this year.  Markets will be closely listening to statement made filling the announcement, where they could step up the rhetoric of how strong the US economy is progressing.

 

Next week will also bring news of consumer inflation.  Given the level of upward wage pressure, we could soon see a spike in inflation.  With inflation being the arch enemy of interest rates, this isn’t good news.

 

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