Mortgage Mike’s Daily Rate Commentary

After another failed attempt to break above its 25-day moving average, the US stock market is getting hammered once again in early market trading. This is not a good sign for those hoping for an end of year recovery in the market. If stocks once again test the floor of support, the floor will continue to weaken until it finally breaks through. Think of this as a hammer hitting a window. Although it may bounce off the glass the first several times it makes contact, with each hit the glass is weakening. Eventually it is going to break. When the floor that has held stocks up finally gives, we will see a more dramatic move to the downside, which will help add a nice tail wind to drive mortgage interest rates lower. It may not happen soon, but I believe it will eventually happen.

 

Weak economic reports out of both China and Europe have the US markets nervous of a global slowdown this morning. China’s industrial output and retail sales were the lowest they have been since 2003. When you consider that is even lower than what was reported during the great recession of 2008, that sheds light to the severity of the current headwinds facing the Chinese economy. Clearly, the trade war between US and China is taking its toll. If this isn’t resolved quickly, the overall global economy will suffer.

 

Mortgage bonds remain trapped between their 200- and 100-day moving averages. If they remain above their 100, there is no need to immediately rush to lock. However, the potential improvements are minimal. Given the risk/reward tradeoff, we will maintain a locking bias.

Both stocks and mortgage bond prices are relatively flat so far today, as both markets sit in the middle of wide trading ranges. The challenges with being in the middle are that volatility can be exacerbated, causing wide swings in one direction or the other. It seems that with little news driving the markets, they are watching each other closely to help decide which direction to take. Given that the technical picture for mortgage bonds is not favorable now, the next major move could be an unfavorable one. However, if the 100-day moving average holds, mortgage interest rates should be somewhat stable. If this level does fail, rates will most certainly take a step higher.

 

This morning’s Initial Unemployment Claims number came in well below what the market anticipated. However, economists clearly weren’t considering the impact to a company for making layoffs just before Christmas when they came up with their estimates. There is a stigma around businesses that fire people just before Christmas, which keeps many people who should be fired still employed until after the New Year. So realistically, the number of new Unemployment Claims will be lower throughout the end of December. Once we get into mid-January, watch out. We could see a pent-up demand of layoffs hit the market at once, which will contribute to the first quarter of 2019 starting out on shaky ground.

 

Once again, we will maintain our locking bias.

Mortgage bonds have taken a turn for the worse, with the charts pointing towards upward pressure on mortgage interest rates in the short term. This purely technical outlook does not have a lot of reason behind the prediction, other than the technical outlook shows that bond prices have reached a ceiling of resistance that bond prices are unlikely to surpass. Based on the news, we received the Consumer Price Index (CPI) report this morning that shows that inflation remains tame. This could help reduce the likelihood of the Fed continuing to hike short term rates. Although many experts, such as Merri Lynch, predict three rate hikes in 2019, I see either zero or possibly one. In fact, I think the Fed will need to reduce rates as we head into 2020.

 

The stock market continues to bounce wildly from up to down. After a strong opening yesterday, stocks lost all their gains and closed lower for the day. This morning, so far, they are up strongly. I don’t see a reason for stocks to climb much higher in the short term, especially with continued political pressure against President Trump continuing to build. As the White House prepares for an impeachment battle as the Democrats take the majority in the Senate, this could hinder the momentum the Trump administration has had towards investor friendly policies. That will hurt the stock market and likely help improve mortgage interest rates. Combined with a pending recession and a slowing housing market, 2019 could be an interesting year.

 

We will maintain a locking bias.

In perfect textbook fashion, stocks took a strong bounce higher yesterday after hitting the significant floor of support we have talked about in recent market updates. The bounce was strong enough to erase a nearly 500-point drop in the DOW. The upward momentum is still strong this morning, as markets continue to climb higher once again today. Although this is purely a technical move higher, investors are crediting improved relations between the US and China. However, the stock market would have bounced off this floor regardless. It will likely take something very negative in the economy or in the on-going saga regarding President Trump to push stocks below this level.

 

The upward momentum in the US stock market is in no way a sign that stocks are out of the woods. Even in a falling trend, markets will pause and regain some of their losses before making another run lower. Increased volatility is often associated with markets entering a bear market. Clearly, we have recently experienced an uptick in volatility. Although most economists don’t yet see a recession as imminent, I strongly believe that we are now in the early stages of a downturn. Even looking back on history, the bond markets inverted in 2005. For many, that is a definite indicator if a recession to come. Most didn’t see the extent of what was coming until it was well underway, with much of the impact still unknown until 2008.

 

We will maintain our locking bias.

Stocks had another terrible day on Friday, with prices falling to the floor of support we have identified in recent market updates. Unfortunately for mortgage interest rates, this floor has once again proven its strength. Although I believe a drop beneath this critical level is imminent, the timing of this occurring is unknown. It will likely take a negative event to provide stock investors with the deep dose of reality that I believe they should have caught on to long before now. I realize that my opinion may not be in line with what most economists believe. However, more and more are moving over to my point of view each day.

 

A look back on the history of mortgage interest rates, there are clear situations that led to most major interest rate declines. One of the greatest influences has been events overseas. Consider the impact Brexit had on mortgage rates, or the debt crisis in Greece. These events were responsible for driving U.S. interest rates down into record low territories.

 

I believe that we are once again on the verge of facing more crisis in Europe. First, Brexit is currently scheduled to begin on March 29th. This major event could throw the U.K. into a deep recession as it learns how to function apart from the European Union. In addition, there is a major crisis brewing in Italy that would have a severe impact on the global economy. I believe that as a result we will see global yields fall, which will help support lower mortgage interest rates.

 

Unless mortgage bond prices can break above their 200-day moving average, we will maintain our locking bias.

U.S. stock markets are once again getting slaughtered, losing the significant gains they made in late day trading yesterday. Clearly, there is a lack of trust in the strength of the U.S. economy or geo political concerns that are causing angst within the mindset of investors. This is a huge adjustment from where things were just 12 short months ago when the markets were celebrating the tax credits and ongoing deregulation in the financial markets. From that to now fearing a recession is a significant adjustment. Many who once believed the good times would be around for many years are now second guessing themselves.

 

This morning’s Bureau of Labor Statistics (BLS) report showed that there were fewer new jobs created than the market anticipated. This unanticipated slowdown is adding fear to the markets, which could also partially explain the large drop in stock prices today. The Unemployment Rate remained steady at 3.7%, which many are celebrating. To me, this is a terrible indication of where things will be heading soon. With the Unemployment Rate now near a 50-year low, there is only one way for this to head. And history shows that after this rate hits the low point of the cycle, it jumps up dramatically in the months to follow.  We can count on this happening once again in the future.

 

Mortgage bonds are right up against their 200-day moving average. Odd are that they will not make a decisive break above this critical level yet. Therefore, we will maintain our locking bias.

Financial markets were closed yesterday in observance of former President George H. Bush. However, the day prior to the market’s closing was a horrific one for the U.S. stock market.  The downward momentum is continuing so far this morning. However, there appears to be a light at the end of the tunnel. Stocks are now approaching a low that has continually held for more than one year. Further, mortgage bonds are now approaching their 200 day moving average. Since they have not breached this level in well over a year, it is unlikely they will be able to break above this critical level on the first attempt. Clearly, this means we expect to see the stock market improve in the near term and upward pressure added to mortgage interest rates. Will the improvement last?  There has been so much volatility in recent months. I see the level of volatility continuing, which will be helpful for the longer term outlook of mortgage interest rates. So while I see a breakthrough coming, don’t expect that to occur immediately. It will take time.

 

We are going to switch our stance back to a locking bias.

Both the U.S. stock and bond markets are current at critical points, with each likely closely monitoring the other for direction. Stocks are poised to open lower when the trading bell rings, while mortgage bonds are showing a slight improvement. Today is set to be an interesting one for President Trump, as Robert Mueller is scheduled to release the first of a series of disclosures surrounding the election that could be harmful to President Trump. Depending upon the extent of damage, if any, we could see the stock market react negatively to the news. This would likely benefit mortgage bonds, which have already experienced significant improvements in recent weeks.

 

With the spread between 10 year and 2-year Treasury Notes now about 10 basis points apart, it’s important to understand why I believe this is a precursor to a recession. With the spread between the two inverts, you will be able to invest money and tie it up for only two years and be paid a higher return than if the money was tied up for 10. The longer you commit to an investment, the higher the rate of return is. This is a deflationary indicator, which is a sign that the market believes that longer term rates will be lower in the future than they are today. So, although this does not help push the economy into a recession, it is a symptom of one to come.

 

If mortgage bonds can break above their 100-day moving average, we could see another step lower in rates. Watch the markets closely if you choose to float, as sentiment can reverse quickly.

Markets experienced their first yield curve inversion in over a decade today, with the spread between the 3 and 5 year notes falling negative.  Although the more closely watched spread between the 2 and 10 year yields are still about 20 basis points away. This move is the first sign of what I believe will be an overall yield curve inversion. Historically, an invested yield curve is one of the most accurate precursors to a recession. This will likely cause the Fed to reconsider their intent of continuing to hike short term interest rates, as Fed President Jerome Powell mentioned last week. This is a sharp turn from his statements made just a few short weeks ago where he indicated that continued rate hikes are justified. This falls in line with my longer term prediction that mortgage interest rates will fall in the months to come. Given that few economists currently are aligned with this belief, this statement should be taken with a grain of salt. While most believe that both mortgage interest rates and home values will continue to climb higher, I strongly believe that one or both will soften.

 

A cease fire was announced in the trade war between the U.S. and China, which has fueled stock prices higher. This has also fueled hope for a year-end stock rally that could put stocks back on a path of earning a reasonable return for the year. However, a look at the charts will show that the recovery is now near a 50% correction of losses, which is typical in most any significant period of loss. Meaning that unless stocks are able to make a decisive break above current levels, this could be a short term recovery as stock prices make their way down the charts. The next few days will be extremely important for stock investors. If prices do break higher, they would have an easy path to reach new all-time highs  Regardless, the volatility is not a good sign for stock investors. Personally, I’m skeptical of this move higher and see the volatility as a sign of nearing a bear market.

 

With bond prices moving higher, there is no need to immediately rush to lock. However, be careful of the 100 day moving average. This could prove to be a strong ceiling of resistance that could cause bond prices to fall.

Mortgage bonds failed to advance yesterday, as bond prices softened. Fortunately, prices remain in an upward trading channel, at least for now. However, they are currently at the bottom of this channel, so we could see this change. With a strong ceiling of resistance not too far above current levels, we will soon learn if we will see rates improve or move a bit higher in the near term. This will heavily be influenced by the 10 Year Treasury Note yield, which has fallen to its 100-day moving average. If we see a break beneath this critical level, we will likely see mortgage interest rates also improve. But because this is a strong floor of support, we shouldn’t plan on this happening.

 

Next Friday we will receive a report on the job market from the Bureau of Labor Statistics (BLS). Given that we have seen an uptick in Unemployment Claims in recent weeks, it will be interesting to see if the labor force is weakening. The current Unemployment Rate sits near a 50-year low, at 3.7%. Will we finally see this important indicator move higher; I’m not sure. But I do know that history shows that after hitting a low point of a cycle, this rate is almost certain to take a steep jump higher. That would indicate the beginning stages of a recession. I don’t believe we are there quite yet. However, I do believe that time is not too far into the future.

 

Given the resistance levels the bond markets are facing, we will maintain a locking bias.