Mortgage Mike’s Daily Rate Commentary

After matching the lows the stock market has seen since early June, the market bounced higher today.  The strength in the stock market also corresponds with mortgage interest rates bouncing higher after hitting lows matched in November of 2016.  This is very much a technical move, which is why it was an easy call for us to switch to a locking bias yesterday based on how the pattern of the charts were playing out.  Although I believe that mortgage bond prices will eventually improve, it will take something significant to drive mortgage interest rates into lows that we haven’t seen in nearly three years.  That will take a bit of time.


Consumer Confidence levels fell in this morning’s report, showing a reading of 92.1 when the market was anticipating 97.5.  This was likely due to the extreme volatility of the stock market creating concern in the consumer.  If the market volatility continues, we can anticipate that to continue to wear on the mindset of the consumer, which will be passed down in Retail Sales and other reports.


With mortgage bonds not only under pressure, but also still near the top of the trading range, we will maintain our locking bias.

Mortgage bonds are having another great day today, climbing back to the top of the trading channel just as we anticipated in yesterday’s market update. The news of the day was once again out of China, with talk of more retaliation coming our way. This is just more of the same, which at this point is getting absurd. It’s shocking how reactive the market is to both positive and negative news surrounding the trade war. There seems to be some much posturing and crying wolf that strong money investors should see right through this. There is certainly a lot of weak money and day traders that are creating much of the massive movements. Of course, there is big money jumping on the short-term opportunities. However, don’t count of the strong money staying in this volatile game for too long. They will see the writing on the wall. Therefore, I continue to see trouble brewing for the stock market in the long run.


This morning’s Retail Sales report came in showing a gain of 0.7%, which far exceeded the 0.3% the market anticipated. However, this number includes the transportation component, which can greatly skew the numbers because of high priced luxury cars. When you exclude transportation, the number comes in at only a gain of 0.1%. This is truly not a good sign and points to a lack of the average consumer spending. Big money investors watch the Ex-transportation figures. So, as most investors only consider the headline figure, smart money sees a completely different picture.


With bond prices heading to the top of the trading range, we will now switch to a locking bias. If bond prices do break above resistance, mortgage rate pricing could improve. However, watch for a Trump Tweet that could cause stocks to bounce higher, adding upward pressure to mortgage interest rates. Just a guess, but it seems overdue.

The yield curve that we have talked about for many months finally invested this morning, with the 2-Year Treasury Note paying a higher yield than the 10-Year Treasury Note. This is one of the strongest forecasters of a pending recession and could spell trouble for the stock market which clearly has not been pricing in a recession into stock values. This hit the markets hard this morning, with stock prices once again falling sharply on the news. Although an invested yield curve doesn’t start a recession, it is a clear symptom of something wrong in the economy. Keep in mind that this is just one sign of what is to come. There are other strong compelling arguments that point to what I believe is an imminent downturn in the US economy.


One reason that many Americans do not believe we will be in a recession is that job growth, the stock market and overall economic conditions here in the US have felt good. The first thing I will point out is that most every recession immediately follows a period of almost illogical strength in the economy. Just look back at what the Fed and most economists believed back in 2005 and 2006. Remember then Fed Chairman Alan Greenspan’s comment about, “Irrational Exuberance”? The stock market that he was referring to was nowhere near as irrational as the stock market we have experienced in recent years. Remember that history is the best predictor of the future. Learn the lessons and don’t repeat them.


As planned, bonds hit the bottom of their trading channel and are now moving higher. There is no need to immediately lock. We can now expect to see bonds move to the top of the channel before hitting resistance.

Stocks are coming back strong following President Trump’s announcement that he will delay the recently announced 10% tariff against all remaining goods being imported from China until December 15th. The back and forth rhetoric surrounding this topic is nearly laughable at this point. The change of tone between the US and China are causing many people to either make or lose massive money, depending upon whether they can predict the next Tweets from the President. Boy, if you had insight to what messages he will be Tweeting, you could make billions. Now that has my conspiracy theorist mind rolling….


Merrill Lynch economists have updated their outlook and are now predicting a 20% chance of a recession in the next 12 months. Further, they now see two more ¼% rate cuts in 2019. This is a big change from their projection last December of 3 rate hikes in 2019. Although I still believe they are underestimating the odds of a recession, their new outlook for continued Fed rate cuts is now in line with what I believe is a more realistic prediction.


Invested yield curves continue to be a strong topic of economic discussion, with the spread between the 2- and 10-Year Notes coming within two basis points of each other. It seems imminent that the two-year yield will eventually surpass those offered on the longer term 10 Year Note, which is a strong predictor of a recession. We will continue to watch this spread and keep you updated.


Mortgage bonds remain trapped within the downward trading channel. However, as predicted in yesterday’s report, bonds have now hit the bottom of the trading channel. This provides an opportunity for bonds to improve in the days to come. There remains great risk in floating. However, bonds could bounce higher in the near-term.  If you choose to float, do so carefully.

Stocks are starting the day lower in early market trading, as fear continues to plague the stock market. With corporate earnings per share dropping and the average price / earnings ratio becoming bloated, the record high prices we have seen in the U.S. stock market have not truly been justified. Historically, stock prices have reflected a view of what the future is expected to hold in terms of earnings and GDP. The market got to a point that had little to justify prices. It was as if investors were intoxicated on hopeful profits to be made. It’s hard to say if the weakness will lead to an eventual bear market just yet. However, it will come. The only question is – when?


Mortgage bonds are showing some strength. However, since bond prices are in a short-term downward trading cycle, they may have a difficult time making any reasonable gains. My expectation is that bond prices will touch the bottom of the channel before they can muster the strength to climb above the top. So, although stocks are falling and the 10 Year Treasury Note yield is falling, I still don’t see mortgage rates making any significant improvements in the very near term. Once bond prices hit the bottom, that’s when I expect to see something positive happen. In the meantime, I wouldn’t get too excited.


I see the risk of mortgage pricing worsening slightly in the coming days. Since I don’t expect too much damage, there isn’t a real rush to lock. If you choose to float, do so carefully.

The most concerning indicator as I review the charts this morning is the narrowing spread between the 10 Year Treasury Note yield and the 2 Year Treasury Note yield. Although many yields are currently inverted, this has not yet crossed. However, the spread now has narrowed to only 10 basis points, which is the closest the two have been in 11 years. Since this is one of the most accurate indicators of a recession, the narrowing spread should be deeply concerning to those who don’t believe we will soon find ourselves in a recession. Once this crosses, it is nearly a sure thing that within two years a recession will be upon us. So, watch this level closely, a recession will impact all of us.


Despite all the volatility in the stock market, mortgage bonds have remained within their trading range. It’s crucial that bonds hold the current channel for mortgage rates to remain near current levels. If this level is breached, the damage could be great. There are multiple floors of support propping bonds up right now. To break beneath them would just create challenges for the bond market as bonds would then be forced to break above them in order to get rates back to where they are today. I believe we will see bonds hit the bottom of the trading channel before showing any strength. So be on guard, I see things getting a bit worse before they get better. But I do believe they will get better.


Although bonds have strong support, you must be careful. Only float if you are able to stomach the risk.

In nearly perfect technical fashion, the stock market bounced back and recovered all their losses from earlier in the day yesterday. This happened later in the afternoon, after stock prices hit the same low levels the markets achieved on Monday when stocks experienced their worst day of 2019. The floors of support and over-head ceilings have proven to be a very accurate indicator for predicting movements in both the stock and bond markets. Stocks are expected to open the day higher once again this morning, which means they are likely to challenge the ceiling of the 100-day moving average at some point today. If stocks can make a break above this critical level, it could force interest rates to take a step higher. As we’ve talked about before, mortgage rates will have periods when rates are moving higher, even though in the longer run they will continue to fall. This is just one of those moments.


It seems that Chinese policy makers are attempting to stabilize their currency, which should help calm global fears of a currency war. To explain how this works, if China wants to counter the tariffs initiated by the Trump Administration, it can weaken its currency to make its products more affordable for US consumers. This counters the impact of the additional tariffs. This move was not taken kindly by President Trump, who quickly criticized China for the move, labeling them “currency manipulators.” Although US consumers would be able to purchase Chinese goods at a lower price, the move China made hurts US businesses that export products to China.


Mortgage bonds have a strong floor of support just beneath current levels. The general rule would say to float at this point. However, if stock prices continue to climb, it could add enough pressure to push bond prices beneath the floor. I continue to suggest floating long term and being very cautious in the short term.

After yesterday’s rally, stocks are falling hard in early morning trading. This move is being fueled by news out of Germany that has caused the yield on their bonds to fall to the lowest levels ever. This monumental move is a clear sign of presumed weakness and is flowing into the US markets. Whether or not this will be enough to push mortgage bond prices above the duel ceiling of resistance remains to be seen. In the meantime, we get to enjoy mortgage rates that match lows that we last saw in the final months of 2017. I continue to believe that we haven’t yet seen the lows we will get to see in this rate cycle. I see lower rates ahead.


Market investors are becoming more aware of the probability of a recession, which is also contributing to the drop in mortgage interest rates. In fact, today’s Industrial Production report registered the biggest decline in almost a decade. As concerns and the reality of what lies ahead escalate, we can expect to see further declines in the stock market and bond yields. I believe that we will soon see the lowest yields in history in the 10 Year Treasury Bond market. This will cause safe money to flow into the mortgage bond market, which will help lower mortgage interest rates. Look for continued slowing in the pace of home value appreciation. Although that is not an opinion shared by many economists, I see it as likely.


Unless bonds can break above the duel layer of overhead resistance, there is great risk in floating. There is no need to immediately lock. But unless bonds make a break higher, there is no benefit to float on loans that need to close in the near-term. Of course, continue floating on longer term transactions.

Yesterday’s prediction of a stall for mortgage bonds at current levels was well timed, with bond prices falling in early morning trading. If you locked in your rate yesterday, congratulations, you locked in at the best pricing in the mortgage market that we have seen since late 2017. Today’s move lower in the price of mortgage bonds is directly in opposition of the stock market, which is now recovering some of its losses after facing the worst day of 2019 yesterday for the US stock market. With President Trump labeling China as a “currency manipulator”, it seems that the relationship between the US and China is not improving. Until the two powerhouses can come to a trade agreement, expect more of the same, which means volatility.


Many people looking to lock in a low mortgage interest rate are wondering why mortgage rates aren’t falling at the same pace as the 10-Year Treasury Note yield. I’ve had so many questions surrounding this in the past few days that I will take a minute to explain. First thing to know is that mortgage bonds and the 10 YTN will not trade in lockstep. Although they will generally move in the same direction, the adjustments will never be equal. Since the Fed is still reinvesting proceeds from their balance sheet into the 10 YTN market, this rate is being driven lower relative to mortgage bonds. If you remember, the Fed stopped purchasing mortgage bonds many months ago. They continue, however, to purchase 10 Year Treasury Notes. Therefore, the 10 Year market is seeing the additional benefit of the Fed. That is one primary reason mortgage pricing hasn’t improved as much as the Treasury market.


With bond prices beneath a duel layer of overhead resistance, we will maintain a locking bias.

The trade war with China is heating up, as China continues to devalue its currency to offset the additional taxes the tariffs have created. For example, if China were to devalue its currency by 10%, it could essentially negate the additional tariffs that are set to hit in about one month. A devalued Yuan will make it less expensive for a US consumer to purchase Chinese goods. So even after the impact of the tariffs, the US consumer doesn’t pay more for the product. On the flip side, it will make exports out of the US and into China more expensive, which will hurt US businesses that send products to China. Although this helps to pressure mortgage interest rates lower, it is not a good thing for the US economy. If this battle isn’t resolved soon, the odds of a recession will continue to climb.


The US stock market continues to fall, with prices breaking hard beneath the 100-day moving average already this morning. With the 200 DMA a ways beneath current levels, it is possible that stocks will continue to move lower. The current bull-market for stocks is now the longest running in history, which should be more concerning to people than it seems to be. At some point, the market will turn. Is this the beginning? There is no way to say for sure. Stocks have fallen sharply like this multiple times in recent history, only to come back and set new all-time high records. I believe that a solution to the trade war is the best things we can hope for.


Mortgage bonds are now just beneath a critical duel ceiling of resistance. I believe we will see a stall at current mortgage bond prices and likely even see pricing increase in the short term. I see a greater risk in floating that in locking on loans that need to close soon. However, I still believe that longer term rates will be lower.