Mortgage Mike’s Daily Rate Commentary

Mortgage bonds are holding ground today, supported by stocks which are showing a negative early technical signal.  If stocks happen to retreat more, this will help support holding mortgage interest rates near current levels. However, if stocks make another run higher, it could be time for mortgage bonds to take a break from their extended rally.

 

According to members of the Federal Reserve, the growth of the US economy is showing signs of weakening. This is not good news for the US stock market, which should be having a more adverse reaction to the news.  With many large financial institutions predicting very little upside potential in stocks over the next year, it remains a mystery why stocks remain as strong as they have.

 

Somber news of a declining housing market was released by CoreLogic this week. The real estate data company predicted a slow in growth of home values through the end of the year and the first negative value growth (-1.9%) in 9 years by April of 2021. The company claimed that “pent-up” demand and a lack of supply kept prices high through the COVID shutdowns; however, the first signs of a decline will be reflected in June’s numbers. We will keep our eyes on this!

 

We hold a locking bias.

Stocks are making a breakout to the upside, as they look to challenge the levels last seen on June 8th.  The stock market seems to be less concerned about the growing numbers of Covid cases as time goes on. Rather than focus on the economic risks associated with the pandemic, investors are choosing to focus on the strengthening economic numbers. Although the base line from which we are seeing improvement is well below the worst numbers ever reported, growth is progress and investors seem to remain assured that the US economy will be back on track by the 3rd quarter of 2020.

 

Black Knight, a real estate and mortgage tech firm, released a market report claiming that 90% of qualified borrowers with sufficient equity in their homes are currently able to lower their rates and see lower monthly payments. Black Knight estimates the pool of qualified refinance candidates is around. of 13.6 million properties with a potential average monthly savings of over $200/ month. This is great news for consumers who decide to act fast before demand surpasses lending capacity and we see rates rise.

 

The bond market deteriorated slightly over the weekend, even with increasing talk of states increasing COVID restrictions. The market is completely reliant on state governments reaction to the number of increasing cases across the country.

 

With increase in demand and vast uncertainty in the market, we hold a locking bias.

Stocks are climbing higher this morning, moving towards the top of the trading channel.  This move was spurred by a strong Bureau of Labor Statistics (BLS) report that showed 4.8 million jobs created in June.  Further, there was an additional 2.5 million gain to the May report.  With this report being much stronger than the market anticipated, we are seeing stocks rally.  However, with the top of the trading channel just above current levels, it seems more likely to see stocks pause rather than continue to climb.  We will have to wait and see how this plays out.

 

Another important component of the BLS report is the Unemployment Rate, which showed a decrease from 13.3% down to 11.1%.  Again, this report was stronger than the market’s expectations of 12.3%, and shows that millions of American workers have returned to work.

 

Initial Jobless Claims were also reported this morning, showing that a staggering 1.427 million workers filed for first time benefits last week.  Continued Claims saw little movement, showing that 19.29 million people who have been unemployed continue to receive benefits.  This doesn’t necessarily coincide with the strong job gain report from the BLS, so it will be interesting to see how the next month plays out.

 

With stocks near the top of a trading channel, we could see mortgage bonds stabilize for the moment.  However, bond prices also remain near the top of a trading range, which makes locking a prudent move for many.

We received the first of two important measures of growth for the labor market this morning, with ADP reporting that there were 2,370,000 new jobs created in the month of June.  Although this was slightly below estimates, the market is celebrating an upward revision of nearly 6,000,000 jobs in the month of May.  Overall, this shows that millions of people have returned to work after being temporarily laid off following the job loss peak.  Tomorrow, the Bureau of Labor Statistics (BLS) will report their estimates of new job creation.  This is the more credible of the two reports and therefore has a greater chance of impacting mortgage interest rates in the near term.  So tomorrow could bring enhanced levels of volatility for mortgage interest rate pricing.

 

The Fed Meeting Minutes from last month’s meeting showed the Fed is discussing controlling the yield curve to maintain a pre-determined rate in in both the long and short term interest rate markets.  This would be an unprecedented move intended to continue to spur economic growth through maintaining low interest rates across the yield curve.  At this point, adoption of this program seems unlikely in the near term.  However, if economic conditions worsen in the future, this will be something the Fed considers.  Such move would ensure low mortgage interest rates for as long as the program is in effect.

 

We will maintain a locking bias heading into tomorrow’s BLS report.

Mortgage bonds have slowly moved to the top of their trading range, which from a technical perspective, means that we are likely to see pricing deteriorate in the days to come.  Since breakouts are the exception and not the rule, it is more common to see a strong ceiling hold in place.  In the event we do see a breakout, that would mean better interest rate pricing ahead.  However, that is rare.

 

As the nation ponders how to deal with the rapidly growing number of Covid-19 cases, famed infectious disease expert, Anthony Fauci, issued a warning that failure to change from the current path could result in a growth rate of 100,000 cases per day.  Although the very thought of this should scare stock investors, they so far seem unfazed by the announcement.  With the state of Arizona now heading back into lock down status as a way to slow the growth rate of this deadly disease, other states will be considering how they plan to stall the growth.  The trade off between sacrificing the US economy or sacrificing US lives is heated battle in many states.  There just doesn’t appear to be good path forward.  The consequences of either are too high to fathom.

 

With bond prices at the top of a trading range, the safe play is to lock.

Today is a quiet day for scheduled economic reports.  However, with important job reports scheduled for later this week, we could have some market moving news.  Current estimates call for 3,000,000 new jobs creates in the month of June, which is estimated to drop the unemployment rate from 13.3% to 12.3%.  With more businesses re-opening following Covid-19 shutdowns, we can expect the employment numbers to improve in the months to come.  The concern will be at what point we see the numbers stabilize.  We do not expect to see numbers get back to where they were in February, before most of the shut downs occurred.

 

After once again hitting the floor of support provided by the 200 day moving average, stocks bounced higher this morning.  This is again a technical move and one that I expect will be short lived.  As long as stocks stay within the current downward trading channel, stocks will likely continue bouncing from the top to the bottom of the channel.  Keep in mind that each time stocks test their floor of support, the floor weakens.  Eventually, stocks could break down in the near term and fall beneath this critical level.

 

Mortgage bonds remain near the top of the trading channel.  The risk of rates pulling back in the near term is high.  We suggest a locking bias.

In late day trading yesterday, stocks took a major bounce off of their 200 day moving average.  Although this move was accredited in the media to investor optimism surrounding continued stimulus, it was a technical bounce that was expected by most advanced traders.  This morning, stocks have already lost all of their gains from yesterday’s late rally, and are once again in a battle with over the 200 DMA.  The key thing to know about technical predictions is that the more times a support line is tested, the weaker it becomes.  This is now the third test in three days.  It seems that stocks really want to break downward.  If that happens, we can expect a more dramatic fall in stocks to follow.

 

This morning we received the Federal Reserve’s favorite gauge of inflation, the Personal Consumption Expenditures (PCE) report showing that inflation remains tame.  The Headline number increased by 0.1% last month, which ended up dropping the annual rate from 0.6% down to 0.5%.  The report showed that personal incomes fell by 4.2%, which was surprisingly low.  Since this number does not take into consideration unemployed workers, this means that the average employed worker has experienced a 4.2% average pay cut.  When you take into consideration the number of people out of work, this is not good news for the US economy.

 

Mortgage bonds remain near the top of a trading channel.  Although there remains little risk in floating at the moment, be on guard as sentiment can change quickly.

Stocks are holding their ground just above their 200 day moving average.  This is a pivotal moment for stocks, as the next move could set the tone for the weeks or months to come.  If stocks bounce (the statistical probable outcome), the rally could be a strong one.  However, if the fear of continued Covid-19 risk and the corresponding risks to the US economy prevail in the mindsets of investors, we may see stocks break beneath this critical level.  In that case, the losses would be significant.  If you are a betting person, now is the time to stake your position on whichever path you believe will prevail.

 

This morning’s weekly unemployment report showed a staggering 1.48 million individuals filed for first time unemployment benefits last week.  To make matters worse, continuing claims, which measure people who previously filed and are still receiving benefits, decreased by only 77,000 in the last week for a total of 19.5 million.  Most markets expected to see more people re-enter the workforce.  However, with the Federal Government still offering an additional $600 per week in benefits, many are refusing to return to their jobs.  I believe the additional benefit will need to expire before we see a massive transition back into the workforce.

 

There remains little incentive to float an interest rate in the near term.

Stocks are falling hard this morning, as the growth rate of Covid-19 continues at alarming rates in many states across the country.  Combined with rumors of a second lock down being discussed in areas of rapid growth, investors are showing signs of concern.  However, with the 200 day moving average just beneath current levels, stocks could see a bounce in the near term.  If prices do happen to fall beneath this critical level, you can expect to see a more dramatic drop to come.  Since breakouts are rare, and considering the Fed may step in to help support stocks, odds are that we will see this level hold, at least for now.

 

The International Monetary Fund (IMF) is projecting the global economy to fall by 4.9% in 2020.  This is a drop from the -2% they had estimated just a couple months ago.  With risks of Covid-19 still a major threat to future growth, we could see this projection worsen over time.

 

The US is weighing adding $3.1 billion of tariffs on France, Germany, Spain and the UK.  This is fueling the ongoing trade concerns that will certainly impact our economy.  This is not good news for many corporations who rely on products imported from these areas, and could come with retaliatory consequences if enacted.

 

Bonds remain trading within a very tight range.  Even though stocks are suffering, there is little incentive to float an interest rate.

Stocks are climbing higher today, following President Trump’s assurance that the trade agreement with China is fully intact.  This follows a statement made last night by White House trade advisor, Peter Navarro, who said the US – China trade deal is over.  Given Peter’s position, it seems there is reason for concern.  However, all stock investors needed was to read a Tweet from President Trump assuring the markets that everything is just fine.  As further news comes out, we could once again see an increased volatility in the stock market surrounding China and the stability of the trade agreement.

 

Rumors of a second round of stimulus checks to American workers is helping fuel the stock market higher.  The unprecedented amount of total stimulus since the economy fell has largely contributed to holding stock prices higher.  As the money that has been pushed into our system flows from consumers to businesses cycles through our economy, this helps expand our GDP.  Further, the trillions of dollars added will continue to flow as the money churns over and over.  Although this is considered highly inflationary, that is the last concern the Fed has right now.  Inflation is not anticipated to be an issue for years to come.

 

We will maintain a locking bias.