Mortgage Mike’s Daily Rate Commentary

After once again getting close to testing the 200-day moving average, mortgage bonds fell lower in early market trading this morning.  The continued failure to break above this critical level is a negative sign for the near-term direction of mortgage interest rates.  The more failed attempts made, the weaker bonds become.  Eventually, the lack of strength will cause investors to lose hope and sell their holdings while at the 200 DMA.  For the rule would state that it is more likely for bonds to break lower than break above this level.  Once the selling starts, it usually causes a dramatic move lower as people rush out at the same time. 

 

This is an extremely light week for economic news, with the only real significant report being Durable Orders.  With Thanksgiving later in the week, we can expect trading to lighten as we move closer to this day.  As that happens, the market moves will be less meaningful, and volatility will increase.  None-the-less, we could easily see bonds continue to fall lower, so we must play this week out carefully. 

 

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

 

After a bumpy road yesterday, mortgage bonds are up slightly this morning.  Yesterday’s fall was primarily due to news that House Republicans successfully passed a tax reform bill. However, with the Senate preparing to vote on their own version of tax reform, there remains a long road ahead.  If the Senate can successfully pass their own bill, the two chambers will have to craft a joint bill before congress can make it law.  Treasury Secretary, Steve Mnuchin, said he expects that President Trump will have a final proposal on his desk by Christmas for his signature.  We must keep in mind that tax reform is not friendly to the direction of mortgage interest rates.  Therefore, we could see an increased volatility as this bill moves into its final stretch.

 

From a technical perspective, mortgage bonds continue to be challenged by their 200-day moving average. If they can muster the strength to break above this critical level, that will be a great sign.  However, since it is considered a trend reversal indicator, we must play by the rule of locking when at the top of a trading channel.

 

We will maintain our locking bias unless bonds are able to break above their 200-day moving average.

Mortgage bonds have continued to climb up to their 200-day moving average.  Now is the critical time that will dictate the near term, and potentially longer term, direction of mortgage interest rates.  Although mortgage bonds have toggled above and below their 200 DMA a few times in recent weeks, this level generally indicates the long-term direction of mortgage interest rates.  It seems that bonds are unable to determine which route to take and are waiting for a strong sign before ultimately choosing a direction.  If they can break above this level, we once again have hope for lower rates in the future.  This is an exciting time as we anxiously await the outcome. 

 

The Consumer Price Index (CPI) dropped from 2.2% down to 2.0% in the month of October.  Although this drop was in line with expectations, it remains above the Fed’s target of 2%.  The Core CPI number, which strips out food and energy costs, came in stronger than expected at 1.8% for the year.  Prior to the release, the market was anticipating the rate to hold steady at 1.7%.  Since this is the less volatile of report, it tends to be what the market focuses on.  Therefore, the headlines are reporting that inflation came in showing strong growth.  This is not a good message for bond holders to hear, as inflation is the arch enemy of mortgage interest rates. 

 

Given that bonds are now right up against their 200-day moving average, we are expecting a pull-back.  As a result, we will maintain our locking bias. 

 

Mortgage bonds are slowly working their way towards the ceiling of resistance.  If we hit this level and break back down, we will confirm that we are still within a downward trend (increasing interest rates).

 

Producer Price Index (PPI), which measures inflation on the wholesale level, came in much stronger than expected for the month of October. Headline PPI was up 0.4%, which exceeded expectations of 0.1%.  On a year-over-year basis, Headline PPI moved from 2.2% up to 2.4%.  Although wholesale inflation doesn’t always get passed on to the consumer, it is still of concern.  Tomorrow morning’s Consumer Price Index (CPI) will be far more important to the direction of mortgage interest rates.  If it shows higher than anticipated levels of consumer inflation, mortgage rates will likely respond adversely.

 

The 10 Year Treasury Note yield is once again challenging the 2.385% level.  If it is able to break below this critical point, that would be helpful for mortgage interest rates.

 

With bonds nearing the top of a trading channel, the general rule would mean we should maintain our locking bias. If tomorrow’s inflation report is low, we could see bonds make a run higher.  That would be great news for mortgage interest rates.  Stay tuned…

Today is another quiet news day, with no significant economic news to speak of.  Again, this brings the technical picture into play.  With bonds now beneath their 200-day moving average, the current medium to longer term trend will be expected to be rates moving higher.  Although a significant negative economic, political or geo-political event could change that, we must make assumptions based on the current data on-hand.  Unfortunately, that isn’t showing a good sign for mortgage interest rates.

 

Over the past three trading days, mortgage bonds have lost tremendous ground.  They are now in a position where they have a strong support level beneath current levels, and the 200-day moving average serving as a ceiling of resistance.  This week’s news will be important, with CPI being one of the reports we will receive.  Until we have news to drive the markets, we will likely trade within this range today.

 

There were Fed members who spoke this morning, virtually confirming the Fed plans to hike rates one final time in 2017.  Further, the Fed is expected to make three rate hikes in 2018.  Eventually, the rate hikes will help slow the growth of the US stock market.  Although there is no sign this has happened thus far, continued hikes will make this a reality at some point.

 

Given the current trend, there is minimal benefit to float.  We may see small improvements in pricing, however, they may not justify the risk of floating.  We will maintain our locking bias.

Yesterday’s negative technical indicators were accurate, with mortgage bonds now beneath their 200 -day moving average once again. This is not a great position for bonds.  We can either expect bonds to improve and regain their position above this level in a short amount of time, or bonds will likely make a more dramatic fall.  History shows that one of the two moves is likely.  Hopefully it will be the former.

 

Stocks suffered yesterday, as the Senate announced their own version of tax reform. Although there are many points where the Senate and House agree, one key difference is the rate at which “pass through” income is taxed.  Since this is a significant point for small business owners, many investors are showing their displeasure by selling stocks.  The Senate’s plan also goes against several key points that are important to President Trump.  The battle over the key differences will soon be heating up.

 

Although we are hopeful that bonds will stabilize, being below the 200-day moving average is not a good place to be. We will maintain our locking bias.

Stocks are sharply lower this morning, amid a report that the Senate plans to delay the tax reform bill until 2019. This news has many investors pulling out of stocks as a gut reaction.  However, since history shows that stock drops tend to be temporary, this will likely not lead to a larger downfall.

 

Later today, markets will have to deal with a 30-year bond auction.  This is certainly a potential market mover, so we need to be on guard if the results show weak demand. Yesterday’s 10 Year Note auction created very little reaction in the bond market.  Hopefully results will be stronger for the 30-year than they were for the 10-year.

 

Mortgage bonds are now beneath the 100 Day Moving Average, so that will now serve as a ceiling of resistance.  Yesterday’s chart shows signs of a Bearish Engulfing Pattern, which is generally a sign of higher rates in the near term. As a result, we will maintain our locking bias.

Mortgage bonds continue to show resilience and the 10 Year Treasury Note yield is currently just a hair beneath its 200 day Moving Average. This strong sign is encouraging as we watch to see if rates will be able to take another step lower.  That would be great news for the housing market as we move into the slower months of winter where fewer homes are sold.

 

Yesterday’s mid-term election had created concern within the Republican Party as to if the overall Democratic win will be a sign for more losses when many Senate and House seats are up for a vote. This could be a sign of trouble to come for the Trump Administration.

 

Stocks are pointed lower this morning. With very little economic news driving the markets, the technical outlook will be the primary driver. So far, this is looking good for mortgage bonds. President Trumps statements last night to North Korea may have stock investors a bit worried as they await a response from Kim Jong-un. If history repeats itself, we can expect defiant words in return for Trump’s verbal threat for them to stand down. That could help mortgage bonds take the next step needed.

 

Bonds still in a vulnerable position, we will maintain our locking bias until bonds have a more comfortable lead.

Mortgage bonds continue to hold up, in spite of stocks repeatedly setting new all-time high records.  The move has been largely technical in nature, fueled by Trump’s pick to release Janet Yellen as the President of the Federal Reserve.  With this week being a light one for scheduled economic reports, the technical picture will continue to heavily influence the markets.  With bonds once again above their 200-day moving average, this is a strong sign. However, the 10 Year Treasury Note yield is now sitting right on its 200-day moving average.  Unless the 10 Year is able to break below this critical level, this could put an end to the improving trend we have been on.  Therefore, now is a time to be cautious.

 

With bonds under the pressure of the 200-day moving average, we will now switch to a locking bias.

This morning’s Bureau of Labor Statistics Jobs report showed that growth in the US labor force was strong in the month of October. According to the report, there were 261,000 new jobs created. Although a very strong number, it was below estimates.  With this last month reflecting employees being rehired following the massive floods, it isn’t really a true reflection of the strength of the labor force.

 

One interesting segment of the report was the Unemployment Rate, which ticked down to the lowest it has been since December 2006. However, this drop was due to a drop in the labor force of 765,000, which is not a positive sign.  For our economy to grow in a healthy way, we need for more Americans to be willing to work.  If that doesn’t happen, we will see wage based inflation move higher as people are having to fight for workers with higher pay.

 

President Trump’s pick to replace Fed President Janet Yellen has the markets celebrating. Jerome Powell is thought to be a more “dovish” choice, which is upsetting many of the Republicans who were hoping for a Fed President who would drive interest rates higher.  However, President Trump seems committed to keeping interest rates low in an effort to maintain strength in the stock market.  Since it seems he is primarily measuring his success based on the stock market, this is good news for mortgage interest rates.

 

Mortgage bonds are still showing a strong technical picture. As a result, we will maintain our cautiously floating stance.