Mortgage Mike’s Daily Rate Commentary

One of the key concerns in the bond market this morning is that mortgage bond prices are now beneath their 25, 50 and 100 day moving averages and have a long distance to fall before hitting support of the 200 day moving average.  After breaking through major moving averages, we generally will see a significant downward movement in price.  This is what we are seeing in early morning trading, which is adding upward pressure to mortgage interest rates.  Until bond prices find stability, we can expect to see mortgage interest rates continue to climb.


Merrill Lynch came out with predictions for 2020, showing an estimates 3300 for the December 2020 S&P 500 target.  This would be an approximate 7% for the year which is a sharp decline from what we have been experiencing.  Further, the GDP estimates for 2020 are set at 1.7%, which is far lower than the Trump campaign would like to see happen in an election year.  The prior election Trump Campaign promoted target GDP growth of 4%, which did not happen.  It will be interesting to see how mortgage rates respond to the lower GDP projections.  Generally, this would help soften rates.  However, that is not happening yet.


We will maintain a locking bias.

Volatility in the mortgage bond market remains high this morning as investors continue to look for direction.  Although bonds opened up stronger this morning, they got within a short distance of what has been a formidable ceiling of resistance before falling sharply.  The downward move, once again, pushed bond prices beneath their 25, 50 and 100 day moving average.  In my opinion, we are more likely to see mortgage interest rates be pressured higher than we are to see any significant improvements in the near term.


Although today is a slow day for scheduled economic reports, it is a very important week for both the stock and bond markets.  The Consumer Price Index (CPI) report that is scheduled for release on Wednesday and will show consumer inflation for the month of November.  If this number continues to climb, we can expect the stock market to rally and the bond market to sell-off which will add upward pressure to mortgage interest rates.  We will also receive a rate update and policy announcement from the Fed on Wednesday.  Since the Fed has basically stated that they are on-hold, we don’t expect much to happen as a result.  The Fed will not be adjusting short term interest rates.


With bonds remaining under pressure, we will continue with our locking bias.

The Bureau of Labor Statistics (BLS) report on job growth in the month of November is in and was much stronger than the market was anticipating. Projections were in the 180,000 range. However, the headline number reported that 266,000 new jobs were created last month. Additionally, there were upward revisions to the prior two months’ reports that added another 41,000.  Still after accounting for the roughly 50,000 of this number that were from GM employees returning after a strike, it is still a strong number and points to continued strength in the labor market.

In addition to strong job gains, the BLS report showed that the Unemployment Rate ticked lower, falling from 3.6% down to match the nearly 50 year low of 3.5%.  Although this is an exceptionally strong number, it could point to troubles ahead for the labor market.  In 100% of the cases where the Unemployment Rate hit a cycle low, it was followed by a strong jump in job losses.  Is 3.5% as low as this cycle will bring?  It’s difficult to say for sure.  However, it is reasonable to assume that it is at least close to a cycle low.  It would be irrational to assume that we would see this number fall much lower.  If that is the case, we will be in for a jump as the next step.

Mortgage bonds remain under pressure and stocks continue to trade higher.  We will maintain our locking bias.

As stocks continue to recover their losses from earlier this week, mortgage interest rates continue to be pressed higher. With just one day until we receive the Bureau of Labor Statistics’ report on the strength of the labor market in the month of November, volatility in both the stock and bond markets will likely remain high today. From a technical perspective, this is currently favoring stocks and placing mortgage bonds at a disadvantage. However, from a logical perspective, the news is likely to favor mortgage bonds over stocks. The market is anticipating further slowing in the overall health of the labor market, which is a reason for stocks to pull back and mortgage interest rates to improve. But the lack of rational behind the current markets is actually having the opposite effect on both markets. At risk of sounding like a broken record, eventually this market will catch up to itself and we will see a correction. It’s only a matter of when.


One key indicator of a recession that is rarely talked about is the level of consumer debt on the books.  There is an unprecedented $250 trillion of consumer debt out there, which I believe is growing at an unsustainable pace.  The eerie thing to consider is that the last time individual consumer debt was as high as it is today is just before the great recession of 2008.  I believe that when the US economy falls into a recession, we are going to see large amounts of consumer debt defaults.  If this occurs, it will have a significant impact on the level of spending the average consumer holds, which will push our economy into a deeper recession.


With mortgage bonds trapped beneath significant ceilings of resistance, we will maintain a locking bias.

After a rough day yesterday, stock investors are back in the saddle this morning and ready to take another chance at making money.  This irrational behavior follows legitimate concerns over a potential stall in signing an agreement with China to help bring the trade war to an end. Often times after a sharp loss in the stock market we will see what is referred to as a “dead cat bounce.”  This is where stocks recover the follow day only to have it a failed short term attempt that ultimately falls flat. We’ll have to see how the next couple of days play out. But this is a possible scenario that I wouldn’t be surprised to see happen.


President Trump did come out this morning and confirmed that trade talks are progressing, again implying that we may soon see an end to the trade war. I don’t know about you, but I find this back and forth rhetoric exhausting.


This morning we received the ADP Job Report, showing that there were only 67,000 new hires in the month of November. This falls very short of the 150,000 the market was anticipating, and could set the stage for a disappointing number on Friday when the Bureau of Labor Statistics is set to make their announcement on job growth.


A deeper look at the ADP report shows that employers with 20 or fewer employees actually experienced job losses. Considering that small business is the backbone of America, this is a concerning report. If the BLS report confirms the same findings, that would help support lower mortgage interest rates.


We will maintain a locking bias.

It looks like investors have once again fallen for another false hope on ending the trade war. President Trump now claims that there is no timeline to sign an agreement and that he may want to wait until after the November 2020 elections are final. This is in direct conflict with recent statements that have suggested that a deal will be signed this month. I continue to believe that a deal will not be signed anytime soon, and that investors will continue to fall for false hopes and make trades based on rhetoric. The good side to this is that it has driven stock prices significantly lower today, which has provided mortgage bonds the strength to break back above their 25, 50 and 100 day moving averages. Overall, this is highly irrational behavior for both the stock and bond markets. The whipsaw effect is in full force and could come back to bite us if President Trump once again changes his rhetoric to support an end to the trade war.


Mortgage bonds are back to the top of the trading channel that they have been stuck within for weeks. If stock prices continue to fall, we could see bond prices break out of this channel, which would allow mortgage interest rates to take a step lower. Since a stock pull-back is long overdue, let’s hope we see rates benefit.


Until mortgage bonds are able to break above the current ceiling, we will suggest a locking bias. However, if bond prices do break higher, we will switch to a floating stance, as we could see all time low rates if that occurs.

As expected, mortgage bonds lost the battle they have been fighting the last couple of weeks.  As a result, bond prices fell sharply and are now beneath their 25, 50 and 100 day moving averages. This is adding upward pressure on  pricing and could spell trouble for the near term direction of mortgage interest rates. Simultaneously,  the stock market is also falling, which helps confirm this is in fact a technical move vs a fundamental change.  With significant ceilings now in place, mortgage interest rates will have a difficult time improving. If stocks happen to continue to drop, that could at least provide a tail wind to help keep bond prices from falling much more. We will have to wait and see how this plays out.


Most of the economic reports of the day have missed expectations, which otherwise would have helped improve mortgage interest rates. All eyes will be focused on the Bureau of Labor Statistics (BLS) Job Report which is set to be released on Friday. It will show the estimated number of new hires in the month of November. With many seasonal retail jobs added in the month of November, it seems that we could see a higher number of new hires than the market is anticipating. That could add a headwind to mortgage interest rates. Further, as we get closer to the release, we can anticipate market volatility to increase. This could be a rough week for mortgage interest rates, so hold on.


We will maintain a locking bias.

Unfortunately for the near term direction of mortgage interest rates, mortgage bonds lost another battle in the fight to break above a critical level that could have indicated a longer term directional change.  For most of 2019, mortgage interest rates trended down.  Although at times, rates ticked up, the overall trend was a decline.  However, in early September, that trend reversed course and pointed up.  Since reversing trends is extremely rare, it was easy to predict that bonds would likely not win this battle; at least not at the moment.


Many of the economic reports released this morning were not bond-friendly and have driven mortgage interest rate pricing higher.  With strong support just beneath current levels, hopefully we will see rates stabilize.  If prices do break beneath current levels, mortgage rates are certain to take a step higher.  We need to keep a close eye on the markets.  I still expect bond prices to make a break in one direction or the other.  Odds remain that we are likely to see rates move higher in the near term.  The exception would be if we were to see a drop in the stock market.


We will maintain a locking bias.

Despite stocks continuing to break all-time record highs, mortgage bonds are holding up surprisingly well under the intense pressure.  This is a sign of strength for mortgage bonds, which compete for the same investment dollars as stocks.  Generally, when stocks make strong gains, it is at the expense of mortgage bonds, so interest rates are driven higher.  However, interest rates have held steady as stocks have made some of the most impressive gains we have seen all year.  As long as bonds don’t give in to the pressure, the stock market rally will eventually stall, giving mortgage bonds a much needed break.  At this point, there is no telling when that will be.  There is little rationale for stocks to keep climbing.  So it is just a matter of time.


We had several reports on the housing market this morning, with most coming in strong as expected.  The housing market has certainly been a pinnacle of growth in the overall US economy for a number of years.  Given that housing and labor markets are closely tied, this has been expected.  However, as we head into 2020, I anticipate the labor market to continue to weaken, which will likely trickle down into the housing market.  Home mortgage payments have already surpassed 25% of a large portion of the US population’s income.  When this occurs, we can expect to see interest rates and/or home prices fall.


As bonds continue to battle the ceiling, we are encouraged by the strength the market has shown.  Tomorrow’s news reports could provide the catalyst to push the market in one direction or the other.  Until we see which way things will go, we will maintain a locking bias.

Another day, another stock market record high run fueled by continued trade war optimism.  This sounds like a broken record at this point.  It makes me wonder just how much more juice this topic can have over the influence of the stock market.  At some point, a trade agreement needs to be priced into the market so that we can get back to a point where stock prices are set based on the long term outlook of corporate America health.  All this is doing is over-inflating an already top heavy stock market.  I believe we’ve surpassed the point of this being an unhealthy market.  The term “Irrational Exuberance” seems to best explain how I feel about the market.


Being the week of Thanksgiving, the stock and bond markets will be closed on Thursday and have a shortened day on Friday.  However, there is no shortage of scheduled economic reports.  Most importantly, Wednesday will bring an update on GDP along with an update on consumer inflation via the Fed’s favorite gauge, the Personal Consumption Expenditures (PCE) rate.  These are two of the most influential economic reports that impact mortgage interest rates.


Mortgage bonds remain in the same tight trading range.  Once thing I know is that a breakout is coming.  It’s too early to say in which direction.  Therefore, we have to assume it will be the path of least resistance, which is not good news for mortgage interest rates.  Unless we see bond prices break above the current ceiling, we will maintain our locking bias.