Mortgage Mike’s Daily Rate Commentary

Mortgage bonds came out of the gates strong this morning, as currency fears in Turkey have experienced a 12% currency plunge since yesterday. This is driving inflation significantly higher in Turkey. To help explain how significant this problem is, the Turkey equivalent to our 10-Year Treasury Note yield is greater than 20%. Compared with a 2.89% yield here in the U.S., this is clearly a problem.


The Consumer Price Index (CPI) report showed that consumer inflation rose by 0.2% in the month of July. This was in line with the market’s expectations, so there wasn’t a reaction in the market. The year-over-year reading came in at 2.9%, which matches the fastest pace of inflation in almost 7 years. Given that consumer inflation is one of the most important drivers of mortgage interest rates, we need to watch this closely. As inflation heats up, mortgage interest rates will climb higher.


Given that bonds remain up against significant resistance, the safe play is to maintain a locking bias.

Mortgage bonds continue to battle the triple ceiling of resistance that has held back mortgage interest rates from improving. Today’s Producer Price Index (PPI) report was bond-friendly, which has helped mortgage bonds improve slightly on the news. The report showed that Producer inflation was unchanged in the month of July, which was well below the gain of 0.3% the market anticipated. Given that tariffs have increased the price of producing certain goods and services, this was welcomed news to the bond market. Tomorrow’s Consumer Price Index (CPI), which measures inflation on a consumer level, will be of greater importance. If this report comes in low, it could provide the catalyst needed to push bond prices above the triple ceiling of resistance. However, odds of that move happening are low; so that’s not something that should be planned on happening.


In light of having minimal economic reports to help dictate the direction of the stock and bond markets, both continue to trade based upon the technical picture. U.S. stocks are having a tough time hitting all-time high levels, as stock investors have seemed to hold off on driving the market higher. This has helped mortgage bonds, as investors have chosen to place money in the safe haven of the bond market. The economic calendar heats up next week, so we could see market volatility increase.


With bonds still contending with strong over-head resistance, we will maintain a locking bias.

The upward trading channel in the stock market remains firmly in place this morning, which is likely why stocks haven’t reacted adversely to the news of China’s recent retaliation to the 25% tariffs that the US will be placing on $16 billion worth of China’s goods being imported into the US. China’s retaliatory response was a tit-for-tat 25% tariff on $16 billion worth of US goods. This will impact US businesses in the fuel, gas, car, coal, grease, Vaseline, asphalt and plastic industries. This will likely influence stock prices as the tariffs go into effect.


Overall, a trade war isn’t a good thing for the US economy. It will create winners and losers, depending upon which side of the tariff they land. Hopefully, the US and China will come to an agreement that will stop further escalation in what seems to be a battle that is far from over.


Mortgage interest rates are just beneath seven-year highs that we experienced just a few months ago. Since early July, the bond market has been relatively flat. With a triple ceiling of resistance holding interest rates from making meaningful improvements, the odds of rates moving higher are greater than rates heading lower.


We will maintain our locking bias.

Today is another day without any scheduled economic news. So once again, the technical picture will drive the markets. With the US stock market within a hair of reaching new all-time high trading levels, the technical outlook for the mortgage bond market is not looking good. I wouldn’t be surprised to see the 10 Year Treasury Note yield hit new multi-year highs in the weeks to come, along with the US stock market surpassing all-time high levels in the coming days. This could easily put mortgage interest rates at multi-year highs in the days to come.


JP Morgan Chase CEO, Jamie Dimon said in a recent interview that a 5% 10-Year Treasury Note yield is “possible” in the months to come. Given that the yield is currently at 2.95%, this would be a significant increase. That would also likely drive mortgage interest rates closer to 6%, which is something that the market hasn’t seen in a long time. Now this is of course just one person’s opinion. I don’t anticipate mortgage rates getting anywhere near 6%. However, Jamie is considered to be one of the most respected voices on market conditions, so his opinions are certainly worth mentioning.


There remains little chance of seeing a significant improvement to mortgage interest rates. The current market still favors a locking bias.

There are no economic reports scheduled for today, so markets will trade heavily based on the technical picture. The only news of the week will be treasury auction results and then some inflation data on Friday.


Mortgage bonds are currently trading in a wide range, with a triple ceiling of resistance holding mortgage interest rates from improving. If bonds can break above this ceiling, it will be a good sign for the near-term direction of mortgage rates. However, since breakouts are the exception and not the rule, we shouldn’t count on that happening.


Given the strength of overhead resistance holding bond prices down, we will have a locking bias.

Today’s Bureau of Labor Statistics (BLS) report showed that new job creations in the month of July were surprisingly lower than the market anticipated. While the market was expecting a number close to 190,000, the actual report came in at just 157,000. However, there were upward revisions to the past two months’ reports that added another 59,000 to the overall total. As a result, the market’s overall reaction was muted. Although we expect to see job gains slow as summer jobs wind down, it was interesting to see the slow-down begin in July.


Another component to the BLS report is the Unemployment Rate. As expected, it fell from 4.0% down to 3.9%. Although this is good news for the labor market, keep in mind that each time the Unemployment Rate hits a cycle low, it is immediately followed by a recession. With the Unemployment Rate near 49-year lows, there can’t be much downward movement remaining. We could see the rate drop to as low as 3.5% or so. However, once the low is reached, history says a recession is immediately to follow.


With the BLS report behind us, there is no need to rush in to lock. Just keep in mind that there is very little room for rates to improve before hitting strong levels of resistance.

Yesterday’s ADP employment report showed that there were 219,000 new hires in the month of July. This was well above the markets expectations of 175,000 and increases the odds of tomorrow’s Bureau of Labor Statistics (BLS) report exceeding expectations as well. With the BLS report anticipated to show approximately 185,000 new hires, it seems likely that we will see the actual number come in well above expectations on the BLS report as well. Considering that the Unemployment Benefits “sample week” showed new claims at a 49-year low, combined with the Challenger Gray Job Cut Report showing that 90% of companies are either in hiring or retention mode, the clear choice is to error on the side of predicting a strong report.


Following a 2-day Open Market Committee Meeting, the Fed released an uneventful report. As expected, interest rates remained unchanged. However, the Fed did strengthen their verbiage on the state of the US economy, going from a “solid pace” to a “strong pace.” This sets the stage for the market to anticipate a rate hike when the Fed meets next in September. In addition, there is a possibility of even one more before the end of 2018.


Given the risks of tomorrow’s BLS report, we will maintain our locking bias.

The bond market is near flat-line so far this morning, as economic news left investors unsure as to which direction to go. Most importantly, the Fed’s favorite gauge of inflation showed that inflation over the last month remained tame. According to the Personal Consumption Expenditures (PCE) report, inflation is running at a 2.2% rate. Although this met the market’s expectations, it is lower than the 2.3% year over year rate that was reported last month. This is overall good news for the bond market, as it shows that inflation remains within the 2% – 2.5% range. Given that the Fed’s target rate was 2% for several years, this is a victory for Fed members to see inflation exceeding their previous goal. In recent months, the Fed has stated that they plan to allow inflation to run above this level for a period before taking a more drastic approach to help tame the growth.


Signs of a housing correction continue to appear, with major housing markets now seeing downward pressure on home values. This happens to correlate with an increase in the supply of homes on the market. In our newsletter that is currently being mailed out to our database, I explain the models I use to help predict where we are in the current housing cycle. One of the final stages of an appreciating market is when the supply of homes listed for sale bottoms out and begins to climb. It’s no coincidence that this aligns with downward pressure on prices. If supply continues to climb, we could see a rush of homeowners list their homes in homes of catching the peak of home values. I feel that opportunity is either close or just passed. We will have to see what the data shows in the months to come.


There remains little incentive to float. We will maintain a locking bias.

Mortgage bond pricing continues to slowly drift lower as a downward trading channel becomes more established. There is about 30 basis points to go before bonds find support. However, since this support level isn’t necessarily a strong one, bond prices could easily drift lower once they hit this level. Given that there is not much room above current pricing before bond prices hit a triple layer of overhead resistance, it seems likely that we will see interest rates be pressured higher in the near term.


This will be an action-packed week for the bond market, with several key economic reports scheduled for release. First, the Federal Reserve begins their two-day FOMC meeting tomorrow, with a decision on interest rates to be announced on Wednesday. Although they will not be raising rates this time, the markets will be listening for clues as to how many more hikes they project in the months to come. If the tone continues to be tightening, investors could panic.


Later in the week we will get updates on the labor market, with ADP scheduled to release their estimate of new hires in the month of July on Wednesday, followed by the Bureau of Labor Statistics’ (BLS) report on Friday. The market is currently anticipating 172,000 from ADP and 188,000 from the BLS. Given that both numbers are below the longer-term average, reality could easily beat expectations. That would add upward pressure to mortgage interest rates.


Given little hope of improving rates, we will maintain our locking bias.

Mortgage bonds are flat this morning following a strong, but not stronger than expectations, reading on GDP. The first look at 2nd quarter GDP showed that the US economy grew at a pace of 4.1% during this time, which is the strongest reading in nearly 4 years. The overall annualized pace of GDP in much lower, with the last 4 quarters now averaging in at 3%. We will likely see the 3rd quarter GDP come in lower as the “export” component of the report will likely be adversely impacted due to the tariffs.


Next week will be action packed for the bond market, with several key economic reports scheduled for release. Most importantly, next Friday will be the Bureau of Labor Statistics’ (BLS) Jobs Report showing new job creations in the month of July. We will likely see volatility heat up in advance of this report, which generally isn’t good news for those needing to lock in an interest rate.


Given the significant ceilings of resistance holding interest rates back from improvement, combined with the volatility of next week’s economic reports, we will maintain a locking stance.