Mortgage Mike’s Daily Rate Commentary

Stocks started the day significantly lower but have since recouped much of what was lost. We anticipate today to be light, as many traders are still taking time off to celebrate the New Year. However, tomorrow will bring important news, with ADP set to release their number of job creations for the month of December. The market is currently expecting 175,000, which seems to be a high projection to me. However, we will see.

 

Friday will be the big day, with the Bureau of Labor Statistics (BLS) providing their report on the labor market. With volatility in the U.S. stock market at high levels, it will be interesting to see if this has impacted the psychology of business owners. With many considering this to be the beginning of a bear market, it seems logical to assume that many businesses will decide to hunker down and get by with their current level of staff.

 

Mortgage bonds remain on an upward trajectory, which is putting downward pressure on mortgage interest rates. I don’t anticipate any significant improvements today. We could see Friday’s BLS report push bonds above the current ceiling. However, in the meantime, if you are closing soon, now is a great time to lock.

After the single best day in the US stock market since 2009 yesterday, stocks are losing some of their gains in early morning trading. Yesterday brought hope to many anxious stock investors, only to have their hopes crushed this morning. A look back on pre-bear market histories will show a similar picture to what we are seeing happen right now. Tremendous volatility is one of the key forward indicators of a significant downturn in the market.  Although I’ve been saying this for over a year, I believe a downturn is coming. I expect to see days of strong moves in both directions, with an overall trend heading lower in the long term. This is a day trader’s dream market environment.

 

Mortgage bonds seem poised to make a run at the current ceiling of resistance that is preventing rates from making further improvements. If that ceiling is broken, we will see a nice reduction in mortgage loan pricing. Although we hate to see stock investors lose money, this is an ideal situation for mortgage interest rates.

 

There is no immediate need to rush to lock. However, watch the stock market closely. If it makes a comeback, mortgage rates could suffer.

Mortgage bonds are flat in early market trading, while stocks are once again performing erratically. The Dow was up over 200 points, only to fall into negative territory. Although making another run higher as I write this, it is clear that stock investors lack the stomach to make a commitment to continue pouring money into the stock market. However, this downward path has been so strong that it is now time for a relief rally, which I think we will get to some degree. Also, with bond prices not being able to break above the current ceiling of resistance as the stock market tanked; this shows the power of this critical level. I see bond prices likely moving lower to test the bottom of the trading channel. That will put short term upward pressure on mortgage interest rates if that in fact happens. So now is a time to be cautious.

 

President Trump continues to search for a person to blame for stocks turning negative. It seems that he has measured his performance by the path of the stock market, until this happened. When stocks were strong, he attributed that to his policies and the confidence the market has in his leadership. However, now that stocks have lost all their gains of 2018, he has a finger pointed at Fed Chairman Jerome Powell. Trump has been highly vocal about the Fed’s path of continued rate hikes, which I agree has been overly aggressive. The Fed seems to be ignoring key indicators of a pending recession, which they have also verbally stated that they don’t feel is a risk at this point. Regardless, history shows what we can expect after several key indicators show the bull market has exceeded its time.

 

Given the expected pressure on mortgage bonds, we will maintain a locking bias.

What started out as a wonderful day for the stock market has turned into a mess, with stocks back on the downward slide. The continued slide could end up making this the worst week in the stock market since the 2008 financial crisis. At this point, it’s hard to ignore the possibility of this being the opening of a bear market, or at least of more pain to come for stock investors. Regardless, this downturn has created a great deal of fear in the mindset of investors, so a follow up rally is becoming less likely. Even if there is a rally, the level of fear in the markets will make a sustainable rally less likely and certainly less confident.

 

The news of the morning was mainly good for mortgage bonds, with the final read of 3rd quarter GDP coming in below expectations. Further, Consumer Goods was below what the market anticipated. To top things off, consumer inflation has tamed since last month. Each of these added downward pressure to mortgage interest rates.

 

Despite the bond-friendly news, mortgage interest rates have seen relatively little improvement in recent days. After breaking above their 200-day moving average, mortgage bond prices find themselves hitting up against another significant ceiling of resistance. This has prevented mortgage rates for continued improvements. If the damage continues in the stock market, I believe it won’t be long before we see bond prices climb higher and drive mortgage interest rates lower.

 

Although there is no reason to immediately rush in to lock, interest rates won’t improve unless prices break above the ceiling. Therefore, the safe play remains to have a locking bias.

Yesterday’s Federal Reserve announcement provided the ¼% rate increase we planned on.  Although this was anticipated, the market was looking for clues as to what 2019 has in store.  Much to the stock markets’ dismay, they did get word that the Fed is planning on reducing the planned number of rate hikes from three down to two. The stock market was hoping the Fed would not hike rates at this meeting, and further hoped the Fed would state that they are only going to continue hiking if the economic data supported continued hikes. Rather, they said they are planning on hiking, without stating the hikes will be data dependent. This caused the stock market to take on additional losses, which has helped support lower mortgage interest rates.

 

With the US stock market getting hammered in recent weeks, many are wondering when the pain is going to stop. The hope now rests on the 50% Fibonacci Retracement, which is almost exactly where stocks are right now. In a general market, it isn’t uncommon to see up to a 50% loss before heading back up. Stock investors are currently hoping this will be the case for stock prices. Odds are that stocks will at least pause at this level and then make a move from there. We would generally expect stock prices to bounce higher at this point, so we need to be on guard for how that will impact mortgage interest rates in the near term.

 

Given the unknown direction of stocks, we will maintain our locking bias.

All eyes are on the Federal Reserve today, as markets wait to hear if they will be raising interest rates. With the announcement set for noon today MST, we will soon see. I continue to believe that the Fed will follow through on a ¼% rate hike, as they have clearly hinted of this coming in recent talks. I also believe that Fed Chairman Jerome Powell will lower the expectations of continued rate hikes in 2019, stating that decisions to hike will be based upon economic data as it is released. Personally, I’d like to see Jerome hold off on hiking this time. I believe the markets need time to balance out and that hiking today will just increase the odds of the Fed needing to lower rates in the future as we head into a recession.

 

After hitting the same floor of support, we have talked so much about in recent market updates, stocks once again bounced off this floor and are climbing higher in early morning trading. This is a significant floor that truly represents the bottom of a very long-term trading trend. If this floor is decisively broken, we could see a trend reversal, which could point to an early bear market indicator. A break below would also help provide a nice tail wind for mortgage bonds, helping to drive mortgage interest rates even lower. Today’s Fed announcement could influence which way markets head. So be on guard as we wait and see what happens.

 

Mortgage bonds are currently sitting just above their 200-day moving average. Although there is no rush to lock, we can expect to see an increased level of volatility following the Fed announcement. With a strong ceiling once again facing the bond market, I will maintain a locking bias.

In another perfect technical example, stocks hit the floor of support in late day trading yesterday and bounced significantly higher in early morning trading today. However, as we have seen a few times in recent weeks, this rally could be short lived. The key to notice is that each time this happens, the highs become lower and the lows also become lower. This is a clear sign of trouble for the stock market, which is truly long overdue for a significant correction. My guess is that we will see this rally stall quickly and then see stocks test the floor once more. However, this time, I feel we could see a break through happen. That could align with the timing of tomorrow’s Fed announcement on interest rates and the overall state of the US economy. A bearish tone could cause investors to panic, as they should.

 

With more than 72% of Trump supporters polled saying that they believe President Trump has not been truthful about Robert Mueller’s investigation into Russian interference in the 2016 election, it seems likely that some investors will lose faith in the President’s ability to positively impact the markets going forward. When you consider that just 12 short months ago, the markets were cheering the tax reform bill and continuing to see glory days in the stock market well into 2020. As we round the corner and end 2018, it is truly shocking to know that the stock market is negative for the year. Very few economists would have seen that coming.  As we head into 2019, we should take a lesson from ex-Fed Chairman Alan Greenspan, who recently said that he believes the market cycle has peaked. Now is a time to be cautious.

 

Mortgage bonds hit up against their 200-day moving average and have since backed down. If bonds can break above this critical level, we could see a nice improvement to mortgage interest rates. Since breakthroughs are the exception and not the rule, the safe play remains to lock. If you’d like to take a bit of a chance and wait and see, do so only if you are able to closely monitor the markets. Be prepared to lock.

Stocks are at it again; this time falling beneath the low levels they experienced last week. The saving grace could be that they are likely to bounce off the floor of support that is just beneath current levels. In fact, we could see stocks make a nice run higher as the trading day wears on. The general rule is that once the bottom of a trading channel is hit, the next move is more than likely to bounce higher. Although it is certainly possible that stocks could continue to fall, I’d be placing buy orders right now. Keep in mind that if stocks do break beneath this floor, they could have a long way to fall. That would provide a nice tail wind for mortgage bonds and could help drive interest rates lower.

 

Tomorrow is the first day of the Federal Reserve’s two-day Federal Open Market Committee Meeting (FOMC), with the decision on interest rates and monetary policy to be announced on Wednesday. Although we anticipate the Fed to raise rates, we feel they will have a more non-committal tone regarding future rate hikes. This move could help further tighten the spread between the two and ten year note yields. As the two come closer, the odds of a recession intensify.

 

Given that mortgage bonds remain beneath their 200-day moving average, and that we anticipate stocks to bounce higher, we will maintain our locking bias.

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.