Mortgage Mike’s Daily Rate Commentary

Mortgage bonds remain range bound, as investors await the result of the Federal Open Market Committee meeting that is expected at 2:00 pm eastern time today. Investors will be looking for clues to see if the Fed will provide insight as to when we can expect to see a rate cut. Further, they will be looking for clues to see if the Fed now sees a more realistic view of where the US economy is heading in the months to come. As of the last update, the Fed was placing odds of a recession in the 25% range. When you consider that in 2006 the Fed saw the odds of a recession at just 16%, you realize how wrong the Fed has been in the past. I fully believe they are once again missing the boat in their estimates. In 2006, the same reasons the Fed believed a recession would be avoided are in play in the current environment. The lesson to be learned is that when things are so good, people have a harder time seeing what could be around the corner. When in fact, things being too good are generally a sign of weakness to come. Good times can’t last forever.

 

The summer home buying season continues to show signs of weakness, with purchase mortgage loan applications again falling on a week over week basis. This is the time when people would generally be flocking to get qualified to buy a home. If this trend continues, we can expect to see disappointing housing reports in the months to come. With housing being a shining part of recent economic growth, this is not a good sign.

 

In the short term, there remains great risk in floating. However, I remain bullish in the longer term.

The stock market is climbing higher in early morning trading. As we’ve talked about in recent market updates, I see stocks once again challenging new all-time high records in the near term. However, I don’t see the party lasting too long. Since stock investors are celebrating negative news in hopes that it leads to the Federal Reserve to cut interest rates. When you think through the logic, how long will negative economic date be able to add support to the stock market? It’s a backwards philosophy in play right now. Clearly, negative economic data will eventually lead to a drop in the stock market. When that motion comes into play, we can plan on mortgage interest rates benefiting.

 

Mario Draghi, the President of the European Central Bank, announced today that he is pushing for more Quantitative Easing (QE) to help support a sluggish economy and low levels of inflation. The bond market is celebrating this announcement, as it provides a clear sign that the world’s global growth is slowing. This is a big change from how people felt last year, when there was little concern of a slowdown in the pace of economic growth. The good news is that more and more people are aligning with our predictions. The balls are already in motion. We’ll be seeing the pace of economic softening progressing.

 

We remain to have short term concerns over rates. However, long term we remain bullish (seeing lower rates).

Mortgage bonds continue to weaken, as they float within their current trading range. They seem destined to test the bottom of the trading channel, which hopefully will provide support. If this level does not hold, I believe the drop will be temporary. I continue to believe that mortgage interest rates will continue to soften. However, the downward trend will not happen in a straight line.

 

Stocks are pointed higher in early market trading, which is adding upward pressure to mortgage interest rates. All eyes will be on the Fed this week, as investors anxiously await the results of the Federal Open Market Committee meeting, which is scheduled for Wednesday afternoon. Odds a Fed rate reduction are growing, as the Fed and outside economists come to the realization that a recession is likely in the months to come. Look, the Fed will lower interest rates. The question is “When?” As we move into softer economic times, we can expect to see the labor market weaken, which can certainly have an impact on the housing market. I see a buyer’s market nearing.

 

Mortgage bonds will likely face volatility ahead of the FOMC meeting announcement. I suggest locking in the near term and floating in the long term.

Both the stock and bond markets are weak in early morning trading, as investors digest this morning’s economic news and decide what it means to the mortgage bond market. It is an interesting time where bad economic news can be both good and bad for the U.S. stock market. Clearly, good data shows strength in the economy, which is good for stock prices overall. However, during times where there is hope that the Federal Reserve may lower short term interest rates, stock investors will celebrate the steps closer to a Fed rate cut. In such case, weak economic data can also influence the stock market to climb higher.

 

Retail Sales increased .5% in the month of May, missing the markets’ expectation of .7%. However, this is truly a strong number that if it were to continue for an entire year would lead to a 6% rate of annualized growth. This number does fluctuate with the seasons, and the summer months tend to show a strong reading.

 

Mortgage bonds remain trapped in the middle of a trading range. I don’t anticipate a breakout of this channel in either direction today. There remains small mortgage pricing risk for those who choose to float. So, most should consider locking.

Stocks are softening in early market trading. Stocks are in a clear over-bought state, which a forward indicator of weakness and lower stock prices coming soon. The stock move higher was very much a technical one, which seems to be coming to an end. There was very little real news that would justify the strength we had in the market. If stocks do pull back, we can expect to see bond prices strengthen, which will put downward pressure on mortgage interest rates. Since the bond market never moves in a straight line, we will likely see volatility continue at an elevated pace. As stocks move higher, rates will also follow higher. And of course, the opposite is also true.

 

The Consumer Price Index (CPI) report for the month of May was released this morning. Once again, this showed that inflation is continuing to slow. On a month-to-month bases, inflation increased by just 0.1%. This is not a healthy pace of inflation and shows an underlying weakness in the U.S. economy. On an annual basis, consumer inflation decreased from 2.1% down to 2%. As inflation slows, we can expect to hear talk of a Federal Reserve interest rate cut intensify. I certainly see rate cuts in the future, which should also help soften mortgage rates through the next year or more.

 

Mortgage bonds are range-bound. We will likely see relative stability today, as investors look for reasons to buy.

The correction in the mortgage bond market continues once again this morning, with bond prices starting the day slightly lower. This move lower is strongly based on the technical outlook and has little to do with the overall reality of the U.S. economy. With stock prices once again within 2% of setting new all-time high records, is seems investors are ignoring a slowing labor market, trade issues with China, a slowing GDP, slowing consumer spending and on and on….  Although I do see stocks continuing to climb, and likely setting new all-time high records, I see the market softening in the months to come. I don’t think we will see the same level of growth we have had in recent years.

In a big reversal from what Merrill Lynch predicted just a couple of months ago, they recently announced that they now see three rate cuts coming. It was in early 2019 when they predicted 4 rate hikes. This was at a time when the Fed was only predicting three. That is a major change in the views of their economists. It’s nice to see others coming around to the same view we have been sharing since mid-2018. With so many now seeing lower rates, that will help sway investors to make it happen. Although rates may be in a short term move higher, I certainly see lower rates as we head into 2020.

 

In the short term, I will maintain a locking bias.

The big news of the morning was the report on estimated wage growth in the month of May by the Bureau of Labor Statistics. In what is shocking news to many who believe the labor market is too strong to face a slow-down, the report showed that there were only 75,000 new jobs created last month. Given that May is generally the month when many seasonal jobs open, as well as when many students seek summer income, this is not a good sign. This will certainly boost calls for a Federal Reserve rate hike, which not too many months ago was the furthest thought from the minds of the Fed. Since the job market has been a pillar of strength for the U.S. economy, a slowdown in new hires will have a trickle-down adverse impact to the housing market. Once again, most don’t see this happening. However, unless the Fed acts quickly to help slow the start of a recession, I see the housing market slowing.

 

In July, this will officially be the longest-ever expansion for the world’s largest economy. One of the strongest arguments many bullish economists have is the strength of the job market as a reason we will miss a recession this cycle and continue our expansion. I again feel compelled to point out that in history, every time the Unemployment Rate hits a cycle low, it was followed by a sharp increase. Our Unemployment Rate remains near a 50-year low, at 3.6%. How much lower can we expect this rate to fall? If it does fall even lower, which would be minimal if it does, what is the next immediate move? History tells us it will be higher. So, let’s keep this in mind when speaking to people who don’t see a recession coming. Also, remind them that in 2007, the Fed’s prediction of a pending recession was 15%. Well, we all know what happened shortly after. The Fed had it wrong then, and they likely have it wrong now.

 

Mortgage interest rates remain near lows last seen in early 2017. We are right now beneath another strong ceiling. If we can break above this, we will have a floating stance. However, until that happens, be cautious and watch the market closely. Be prepared to lock.

Stocks are significantly higher and mortgage bonds remain in correction mode this morning, as the markets digest all the bad economic news that was released this morning.  To begin with, ADP released their estimate of new job creations in the month of May, and the results were terrible.  While the market was expecting to see 175,000 new jobs created, the actual report showed only 27,000.  This was the worst reading in nearly 9 years and comes at a time when the labor market is generally growing as students enter the workforce for the summer and seasonal hires are in full force.  If Friday’s Bureau of Labor Statistics (BLS) report shows a low estimate as well, this could signal the beginning of a downturn in the labor market.

 

The fact that the stock market is climbing higher today is fascinating.  When you think about is, stocks are climbing as more and more people come to the realization that the next Fed rate move will be lower.  Although that generally helps the stock market, it is also a sign that the U.S. economy is heading lower.  Why would that be a motive for stock investors to step into the market?  It truly doesn’t make sense.  Stocks should be falling, and mortgage bonds should be climbing higher.

 

While bonds continue their technical correction, we will maintain a locking bias for loans needing to close soon.

In yesterday’s market update I mentioned that we are on the verge of a short-term correction in the bond market. I can make these predictions based on the technical picture of the bond market. Since yesterday’s technical signal pointed towards a pull-back, I was able to confidently state a pullback was coming. This morning bond prices did in fact pull back, which added slight upward pressure to mortgage interest rates. How far will this pull-back take us? I predict we will lose at least 38.2% of the gains that we have made in recent weeks. This means we will likely see things get worse before they get better, at least in the short term. I still see lower rates in the months to come.

 

Fed Chairman, Jerome Powell, said this morning that the Fed is closely watching the state of the U.S. economy, and will be willing to make changes as needed. It seems that the Fed has finally acknowledged that the next move in the Fed Funds rate will be to move rates lower. As the trade war now includes Mexico as a target, we will likely see market volatility continue to remain high. Some days will bring good news, like today, and others will bring bad. When good news is released, the stock market will climb, and mortgage interest rates will be pressured higher.

 

Given that bonds are now pulling back, we will switch to a short-term locking position. If you need to close soon, now is a great time to secure a rate.

The mortgage bond market continues to climb higher, as market movers seem to be positioning their holdings to align with a recession heading our way. The last time the 10-Year Treasury yield was this low was September of 2017. There are only a couple more significant floors to breach before yields have a pathway that could take yields down to where we were in 2016 when mortgage interest rates were in the mid to low 3% range. Although it will likely take many months to get us there, I believe it will eventually happen. At that point, we will likely see the U.S. stock market struggling as the mortgage bond market rallies.

 

In a blow to the President’s economic plan, a key U.S. factory gauge has fallen to its lowest levels since Trump entered the White House. This is a sign that President Trump’s trade war is starting to take a toll on the U.S. economy. We are starting to see a more serious impact on the global economy as well as a consequence of the trade war. With a trade battle also heating up between the US and Mexico, that could spell further trouble as the months progress.

 

At current bond price levels, I’m very concerned about a pull-back. We could see prices move lower as investors take some profits off the table. Fibonacci levels would tell us to expect a 38.2% pull back from where bond prices were before the they began their strong climb higher. So, although I’m very bullish on the bond market in the longer term, I anticipate a pullback coming soon. Also, know that I remain very bearish on the stock market. This combination will likely lead to great mortgage interest rates in the future.

 

If you can closely watch the market, I suggest floating. Just keep in mind that I expect a pull-back soon, so we could quickly switch to a locking bias.