Mortgage Mike’s Daily Rate Commentary

Mortgage bonds have again traveled to the top of the downward trading channel. Since we have been in this cycle for many months, the safe prediction is that they will soon find themselves back at the bottom. Stocks have continued to rebound from their recent correction. With only the 25-day moving average as a ceiling above, they have successfully climbed over the most difficult hurdles. We could soon be back to a time where stocks are again setting new all-time high records. The resilience stocks have shown in recent years is astounding.  It seems that investor confidence remains at irrational levels. Unless March’s Fed rate hike scares them away, we will likely see stocks resume their climb higher as the weeks and months move on.

 

The housing market continues to show strength, with the new construction market being the shining beacon within the industry. Given the lack of existing homes on the market, we need new homes to be built in order to keep up with demand. The housing market went a number of years without building sufficient homes following the housing market crash. With builders now back on track, the pace of construction needs to be high for the coming years.

 

With bonds still on the downward trend, we will maintain our locking bias.

Stock markets around the globe continue to recover.  Here at home, the S&P 500 has formed a nice upward channel the past few days and is now looking to climb above its 50-day moving average.  A break above this level could set the stage for a total comeback where stocks have regained all the ground they lost during last week’s market correction.  It seems clear that investors are feeling more confident and ready to pour money back into the market.

 

An increase in the supply of oil reserves has once again pushed prices lower in recent days.  With a barrel of oil now sitting at about $60, this is good news for inflation.  If prices can move down to the $50 or so range, that would be a sign that higher rates of inflation may not be possible.  Since oil is a major expense in the production and distribution of consumer goods and services, lower oil prices help reduce the prices consumers pay.  That would be good news for mortgage interest rates, as the recent climb has been influenced by fear of higher consumer inflation.

 

The downward channel continues in the bond market.  After hitting the bottom of the channel again yesterday, mortgage bonds are now climbing higher.  This bounce from the top of the channel to the bottom has been ongoing for many weeks now.  Since the channel is heading lower, the mortgage interest rates have been climbing higher.  There’s no real way to say at what point this will stop.

 

Until bonds break out of this brutal channel, we will maintain our locking bias.

 

The National Federation of Independent Business (NFIB) showed that optimism among small business owners continues to climb higher.  In fact, it was the second highest level we have since the beginning of the economic expansion.  Many reported plans to hire more employees in the near term.  They further stated that among their biggest fears is attracting qualified talent.  With the Unemployment Rate near record lows, the tight labor market is expected to add upward pressure on inflation as employers are forced to raise wages.

 

Stock markets are down slightly this morning but remain above their 100-day moving average.  Although stocks experienced a 9% correction, the upward trend line is still firmly in place.  For stocks to break this upward trend, they would need to fall beneath their 200-day moving average.  Since this support level held strong, stocks are still likely to continue to climb higher.  Merrill Lynch maintains their belief that the S&P 500 will still end the year at 3,000.  With the index currently at 2,650, there remains a decent level of growth in stocks for this to happen.

 

Mortgage bonds remain in a steep downward trading channel.  As they are currently near the bottom of the channel, we could see some short-term gains as prices gravitate towards the top.  Such gains would be minimal and would not last for long.

 

With the downward trading channel firmly in place, we will maintain our locking bias.

 

Stocks are moving higher this morning.  After hitting their 200-day moving average on Friday, they have bounced back and are now even above their 100-day moving average.  It could be that the stock market found a bottom in this correction cycle.  If so, they now need to break out of the strong downward channel for this to be confirmed.  That would be a strong sign for stocks and could give them the strength to continue to climb higher.  However, this could also be a head-fake that could lead to stocks again falling lower.  In this wild market, anything is possible.

 

Mortgage bonds have again fallen, as interest rates hit multi-year highs once more.  In addition to the volatility in the stock market contributing to higher mortgage rates, we are also facing a significant supply and demand issue.  In 2018, the Fed is scheduled to buy $168 billion less of mortgage bonds than they did in 2017.  In addition, the U.S. government plans to increase deficit spending by 84% over last year.  The way they finance such deficit is through issuing Treasuries or Bonds as debt.  With fewer buyers in the market and more supply, the natural path is for interest rates to move high enough to bring more buyers into the market.  This will continue to pressure mortgage interest rates higher as time goes on.

 

Until bonds can gain the strength to break out of this steep downward trading channel, we will maintain our locking bias.

 

Stocks are all over the board this morning. After climbing in early morning trading, they have since fallen all the way down to their 200-day moving average. This also aligns with the bottom of the steep downward trend stock charts have formed. I would expect to see stocks gain steam at this critical juncture and climb towards the top of the trading range. That would be a normal move, even if stocks maintain their downward trajectory over time. 

 

The stock market has many panicked. After yesterday’s strong losses, the stock market is clearly in corrective mode. This very long overdue move comes at a critical time for mortgage bonds. Since bond prices are also falling and in a strong downward channel, it seems any improvements to mortgage rates are temporary. It won’t be until bonds are able to break out of the downward channel that we can expect to see significant improvements. If stocks continue to fall, that will eventually help mortgage rates improve. There must first be a floor established for the bond market. I feel that will be discovered soon. We will have to wait and see if I’m right. 

 

Next week is a critical week for bonds, as we will learn about the pace of consumer inflation. It seems the market is betting on higher levels of inflation heading our way. Although I do see inflation ticking higher, I’m not one who believes inflation or interest rates for that matter will move too high.  There has been far too much optimism in the markets and in the US economy. Generally, that is a sign of a slowdown coming. Slower growth would help soften both interest rates and inflation. 

 

With limited gains likely in the bond market, we will maintain our locking bias. Let’s hope bonds break out of this channel soon. 

 

The bond market continues to fall, with mortgage interest rates setting new multi-year highs this morning.  The “dead cat bounce” we talked about in yesterday’s market update could be in play in the stock market.  Yesterday’s climb higher came to a halt as volatility increased and the stock market once again closed lower.  It tried to regain its footing in pre-market trading, but fell hard shortly after the opening bell.  Stocks are falling under pressure of the fear of inflation, which is also the reason mortgage interest rates are climbing higher.  With wage advancing, we can expect to see things get worse before they get better. 

Yesterday’s bond auction was met with weak demand.  The reality of higher interest rates is still not sufficient to attract new bond investors, which further panicked the markets.  This sets the stage for rates to be forced even higher to seek the funds needed to maintain sufficient borrowed money to keep the government funded.  With the U.S. government now borrowing at record high levels, the supply of bonds continue to flood the market.  There must be an equilibrium found where investors are willing to step in and buy.  Look for a 3.04% yield on the 10-Year Treasury Note.  We believe this will be achieved in the near term.  If that yield fails to hold and rates move above that level, things could get much worse.

 We have been in a steep downward trend since the end of December.  With no end to this in sight, we will maintain our locking bias. 

Stocks are blasting higher today, following through on yesterday afternoon’s rally. At this point, they have recovered nearly half of their total losses sustained in the recent fall. Given that high volatility remains, it’s difficult to say if prices will get back quickly to pre-correction levels. Recent history of stocks would suggest yes. However, there is still a slight chance that we are now experiencing a “dead cat bounce.” This is where markets show signs of a rapid recovery just to experience elevated volatility that leads to another drop in the market. Regardless of the direction of the stock market, the bond market is still showing signs of a bear market. Based on this, it seems unlikely that we will see any significant improvements to mortgage interest rates in the near term. 

 

With very little scheduled economic reports today, markets will be closely watching the results of today’s 10-Year Treasury Note auction. If demand is weak, that will pressure interest rates higher.  However, if by chance the higher yield brings more buyers into the market than anticipated, we could see rates improve. Given the lack of recent support for bonds, that doesn’t seem overly-likely. However, we will have to wait and see.

 

We will maintain our locking bias. 

 

U.S. stock markets are swinging wildly this morning, as investors appear unsure as to which direction the market will go. At one point, the Dow experienced a 900-point swing within 25 minutes. This follows yesterday’s 1,100+ point loss, which was the single largest point drop in the history of the stock market. Although it wasn’t the largest percentage loss overall, it brought back memories of 2009 when the stock market was in a free fall as Lehman Brothers bit the dust. Having lost 10% of its value, this move was considered the long-awaited market correction many have anticipated. If we don’t see stocks regain their losses, P/E ratios are a bit more reasonable at this point. The price of stocks was just not indicative of what earnings should justify. 

 

Mortgage bonds found temporary relief yesterday, as investors sold stock holdings and moved cash over the safe haven of the bond market. However, the gains were short lived, as this morning has not been friendly to mortgage rates. Given that the stock market drop was largely out of fear of rising inflation, we can expect the trend of higher mortgage interest rates to continue in the short term. Hopefully, bonds will find support at the low levels they achieved a couple of days ago. We will have to wait and see. 

 

We will maintain our locking bias. 

 

After a brutal day in the stock market on Friday, the equity market is once again falling sharply. The forces most are stating as a reason is fear of more rapid interest rate hikes coming from the Federal Reserve. Given that the US stock market has continued to climb even under the pressure of Fed rate hikes, it seems odd that fear of more rapid hikes would create such panic in the minds of investors. It seems to me that we are seeing a technical move lower that is building as investors continue to sell their stock holdings out of fear. It’s been too long since stocks have pulled back. This is a healthy and needed move. Stocks just can’t sustain the rate of growth they experienced without taking a break. 

 

Bonds continue to search for a floor that can stop the current channel of losses. Mortgage bonds are once again at a critical level that will help decide the near-term direction of mortgage interest rates. The issue is one of supply and demand. Budget deficits are at record highs, which means the US government has been borrowing record high amounts of money in the form of selling debt on the open market. With the Fed reducing the number of treasuries they are purchasing, this has greatly reduced the demand. Further, with the US dollar losing value, it has caused foreign investors to become net-sellers of US debt. This further reduces the demand. With supply of debt increasing and investors’ appetites reducing, the only way to attract investors is to offer higher rates. This drives overall interest rates higher, including mortgage rates. 

 

With bonds still searching for a floor of support, we will maintain our locking bias. 

 

Both stocks and mortgage bonds are getting HAMMERED again today, as the technical picture is UGLY for mortgage interest rates. The Bureau of Labor Statistics (BLS) jobs report came in at 200,000 new hires in the month of January. This was higher than the market anticipated. The big number was Hourly Earnings, which spiked up to an annualized rate of 2.9%. This is a big jump from the 2.5% number reported in the previous month’s report, since Average Hourly Earnings are a forward indicator of inflation. Based on this report, we can anticipate inflation to tick higher in the months to come. Further, since inflation is the arch enemy of mortgage bonds, we can anticipate mortgage interest rates to tick higher in the months to come as well. 

 

The last time we had mortgage interest rates as high as they are now was in the early months of 2014. Bond prices quickly dipped even below the lows of this time frame this morning. It appears inevitable that rates will continue to tick higher. One challenge will be that we will have limited data to help show where bond prices will find support. This will make anticipating moves more complicated. 

 

Since early October of 2016, we have seen mortgage rates move from their best levels in many years to their worst. The key change was the election of President Trump. Since he has been in office, the US stock market has climbed to historic highs, the Unemployment Rate hit a 16-year low, and Consumer Optimism has climbed to multi-year highs as well. The change in economic conditions has led the Federal Reserve to raise short term interest rates for the first time in nine years, as well as initiated a massive pull back on the Fed balance sheet. Combined, these forces have pressured mortgage interest rates to multi-year highs. With no end in sight, mortgage rates are expected to continue to climb higher. 

 

Unfortunately, we see rates getting worse as time goes on. Although not in a straight line, bond prices will likely fall even further. We will maintain our locking bias.