Mortgage Mike’s Daily Rate Commentary

Not much activity to report about the mortgage bond market, as prices remain trapped in a tight trading range. Although this trading range has helped provide stability with mortgage interest rates, it has also built up a lot of uncertainty in knowing the next direction we can expect to see mortgage interest rates take.  If bond prices can break above the ceiling, we can expect to see rates come down. However, if the final break is through the floor, we will see upward pressure on mortgage interest rates.

 

The direction of interest rates will be heavily influenced based on what happens to stock prices in the near term. After hitting new all-time high levels earlier this week, stocks have fallen a bit and remain beneath this critical level. If stocks can make a decisive break higher, we will see upward pressure on mortgage interest rates. Of course, the opposite is also true.

 

With bonds remaining beneath a strong ceiling of resistance, we will maintain a locking bias.

Although mortgage bonds remain trapped within a tight trading channel, they found their way to the ceiling today. After spending several days hugging the floor, it’s nice to see a bit of strength showing. The hope is that bond prices will gain momentum and be able to climb above their 25-day moving average which is the current ceiling. A break above this critical level would put a stop to the slow grind higher that mortgage interest rates have experienced the past few weeks.

 

Stock prices set new all-time high records yesterday, which eliminates the past weakness that started about seven months ago. The concern for investors should be whether stocks have the backing to continue to climb higher. Until stocks have experienced a period above the previous all-time high level, prices are susceptible to experiencing a pull back. This would be a technical drop, not necessarily based on new-found weakness in the U.S. economy. In my opinion, stock prices are over-inflated and should come down to more reasonable levels. If that were to happen, mortgage bonds would be the beneficiary, which would help put downward pressure on mortgage interest rates. We will have to see how the next few days play out in order to better gauge the future direction.

 

Although there is no need to immediately rush in and lock, floating remains risky. Unless bonds can make a decisive break above the current ceiling, we will maintain a locking bias.

The suspense continues in the bond market, as investors patiently await signs of a clear direction to take. With bond prices still stuck between the floor provided by the 50-day moving average, and a ceiling provided by the 25 DMA, we have had very little volatility in the price of mortgage interest rates the past couple of weeks. However, this won’t last for much longer. Eventually, bond prices will be forced to decide as to whether to make a break higher or lower in price. Overall, the sentiment has been negative, with prices continually hugging the floor. This is not a good sign for the near-term direction of mortgage interest rates, which are at great risk of moving higher in the near term.

 

US stock prices remain in an upward trajectory, with the S&P 500 not too far beneath all-time high levels. In fact, we could see this record high level be challenged as early as today. This is an incredible event considering that just in early January stock prices were at two-year lows. 2019 has proven to be one of the most powerful years the US stock market has ever experienced. Given that most investors realize that we are on the tail end of an economic expansion cycle, this could spell trouble when the market does retreat. It now has a long way to fall just to get back down to where it was a few short months ago.

 

There remains great risk in floating an interest rate. As a result, we will maintain a locking bias.

Mortgage bonds continue to hug the bottom of the floor of support provided by the 50-day moving average. Today marks the 6th day that bond prices have been flirting with this critical level. The concern is that if this floor is broken, there is a straight shot down to the 100-day moving average, which would push mortgage interest rate pricing higher. One key influencer will be the stock market, which has been vacillating from negative to positive throughout the day. If stock prices decide to take a move higher, this will be bad news for the near-term direction of mortgage interest rates.

 

The big news of the day came from the Existing Home Sales report, which showed a month over month decrease of 4.9% from February. This is highly concerning, considering that mortgage interest rates were falling during this time. Further, Sales were down 5.4% on a year over year basis. This shows an overall slowing trend in the strength of the housing market. As we can expect to see in a slowing market, inventory levels rose from a 3.5-month supply in February to a 3.9-month supply in March. This throws water on those who believed that the slowing housing market in December was a result of the stock market falling, which is also called the “Wealth Effect.” Given that stock prices have climbed back to near all-time high levels, that can no longer be used as an excuse. We will see how this report is justified by those who believe in an endlessly strong housing market going forward.

 

Given the lack of strength in the bond market, we will maintain a locking bias.

The strength of the labor market continues to build, with the weekly rate of Unemployment Claims once again coming in at a nearly 50 year low. This means that fewer companies are laying off. As I have mentioned in many previous updates, this is both a good and a bad sign. It’s very good for the near-term labor market outlook but could spell trouble for the longer-term outlook. Since each time the labor market reaches is highest point in an economic cycle it is immediately followed by a recession, this is likely a sign that a recession is just around the corner. However, many of the top economists use the strength of the labor market as a reason we won’t be experiencing a recession; it’s difficult for most to understand that the strong possibility of a recession is real.

 

The stock market closed out yesterday showing a negative technical pattern, which could indicate that the rise in stock prices is ready to take a break. This would be good news for mortgage interest rates, which generally benefit when stock prices head lower. However, stock prices are pointing higher in premarket trading, which could just be a head-fake. We will have to see where stocks head in the days to come. If they continue to climb towards all-time high levels, that would be bad news for mortgage interest rates.

 

Although I remain hopeful that bond prices will maintain above their 50-day moving average, it’s too early to make that prediction. The safe play remains to have a locking bias.

Mortgage bonds are dangling off a cliff, as they fight to hold on to their 50-day moving average.  This is a big deal for mortgage interest rates, as a decisive break beneath this critical level will spell trouble.  The answer to this will largely depend upon what happens in the stock market.  Given that stocks have been on an incredibly strong path for the past 3 ½ months, where they have made up two years of gains in this short time, it would be difficult to bet against the stock market at this time.  A correction in the stock market is also likely in the near term.  Could the time be approaching soon?  For the sake of interest rates, that would be the best-case scenario.

 

The Mortgage Bankers Association released their estimate of mortgage application for the past week.  The results showed that home purchase applications were at their highest level in 9 years!  This is both a good and bad thing, as we all know what happened after 2010, when purchase applications were at the current levels.  Since history tends to repeat itself, I look for levels to mirror those that occurred just before economic challenges followed.  Is this another sign to be aware of or something to celebrate?  Only time will tell.

 

This is a difficult time to state an opinion on locking or floating.  If rates deteriorate from here, things will get ugly fast.  However, although it is possible for the 50-day moving average to hold, I will still suggest a locking bias.  The risk of the upward move in rates is just too strong.

Just more of the same in the bond market, with mortgage interest rates continuing their slow climb higher. Bond prices remain just above their 50-day moving average, which will hopefully hold prices from falling further. If prices do break beneath this critical level, mortgage interest rates will tick higher, as the next significant floor of support provided by the 100-day moving average is a long fall from current levels. With stock prices again making continued advances, this could provide the catalyst that pushes rates higher. Hopefully, stock prices will not advance beyond all-time high levels, as that would likely trigger a sharp move lower in bond prices.

 

This morning’s report from the National Association of Homebuilders (NAHB) on the Housing Market Index showed that builder’s sentiment is now at a 6-month high. This is not at all surprising, as spring time is when many people make the decision to move into a new home. With builders feeling the increased traffic in their homes, we anticipated this report to show strong.

 

With mortgage interest rates continuing to climb higher, we will maintain a locking bias.

Mortgage bonds have continued to slowly lose value day after day, which has taken its toll on mortgage interest rates. On Friday, mortgage bond prices fell beneath their 25-day moving average. This is not a good sign for mortgage interest rates in the near term. Bond prices are now resting just on top of their 50-day moving average. If they break beneath this critical floor, there is a long way for prices to fall before hitting their next significant support level provided by the 100 DMA. We need to closely watch the direction of the stock market. If stock prices can break above all-time high levels, we can expect to see mortgage interest rates continue to worsen.

 

This is a relatively slow week for scheduled economic reports, so the market will trade heavily based on the technical outlook. At this point, that is not looking favorable. We will receive several reports on the strength of the housing market, which given the spring season upon us, we expect the reports to show a strong housing market. This could also add upward pressure to interest rates.

 

Given the continued headwind against mortgage interest rates, we will maintain a locking bias.

Mortgage bond prices continue to drift lower, which is adding upward pressure to mortgage interest rates. One headwind to the bond market has been an exceptionally strong stock market that has made up nearly two years of gains in the past 3.5 months. That’s a level of optimism in the faith of the US economy that seems irrational given that we are now in the late stages of an economic expansion cycle. However, stock investors generally wait until the last minute before cashing out. Therefore, when sentiment turns negative, there is a mad exit out of the market. That will be something investors will be dealing with sooner rather than later.

 

Speaking of the stock market, current prices are now within just a short distance of all-time high levels. We need to be careful as stocks approach this ceiling. It could be a trigger point where many investors have pre-sell orders in place. If so, we would expect to see mortgage bonds be the beneficiary, which would add downward pressure to interest rates. In today’s world of technical trading, although it’s easier to predict market changes, it elevates volatility.

 

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

This morning’s Weekly Unemployment Claims number showed that there were only 196,000 claims last week, which sets a new nearly 50-year record as the lowest number of claims in one week. This is an extremely strong indication of an insanely tight labor force. While most are citing this as a reason that we will not experience a recession in the coming year or two, this is one of the biggest indicators that we are at the end of the expansion cycle. In every case that the labor market reached its strongest point of an expansion cycle, it was immediately followed by a strong jump higher in the number of Americans who were unemployed. Since its not reasonable to assume things can get much better than they are now, we may be at the low point in the current cycle. If that is the case, we know what’s around the corner.

 

The big news of the day is once again surrounding Brexit, with EU leaders agreeing to once again extend the deadline until October 31, 2019. This much needed agreement reduces fears of an immediate departure, which hopefully will provide the time for a deal to be made that will not result in a catastrophic economic event that would hurt Great Britain. This will likely help smooth out some of the volatility the US stock market would likely have experienced, so that is good news for the near-term performance of the US stock market.

 

Overall, the bond market is not showing much strength. I feel the safe play will be to have a locking bias.