Mortgage Mike’s Daily Rate Commentary

Mortgage bonds remain in Groundhogs Day, unable to break above the critical ceiling of resistance that is preventing mortgage interest rates from setting new 16-month highs.  Without a catalyst to make a break higher, bond prices will eventually get tired of the fight and head lower.  Since significant drops in the stock market haven’t been enough to make this happen, the fear is that the next time we get positive news on the trade battle between the U.S. and China, stock prices will head higher and mortgage bonds will suffer even more.  At this point, that is a very real possibility.


President Trump made good on his promise to increase tariffs on $200 billion worth of goods out of China, taking the tariff from the current 10% up to 25%.  This move was made to intensify the pressure on China to agree to the U.S. trade terms and avoid an all-out trade war.  However, in the meantime, the U.S. companies that purchase goods out of China will be the losers in this round of the fight.  The longer this drags out, the more our GDP for 2019 will suffer.


This morning’s Consumer Price Index (CPI) report, which measures inflation on a consumer level, rose from an annual rate of growth of 1.9% up to 2%.  The Core Rate, which strips out food and energy prices, increased from 2.0% to 2.1%.  Although the increase was expected, it’s important to note that both numbers are above the Fed’s target rate of 2%.


Given the weakness in the bond market, we will maintain a locking bias.

Mortgage bonds remain trapped beneath a strong ceiling of resistance. Given the damage that has been done to the U.S. stock market in recent days, this ceiling really should have been broken. In taking a historical view, this level has been challenged many times just to force bond prices lower. There is one time in the past 15 months that prices were above this critical level, and that was very short lived. If the sharp drop in the stock market, combined with the threat of an on-going trade battle with China isn’t enough to help push bond prices above this level, it’s hard to say what will. We have a report on consumer inflation due out tomorrow. If the reading is low, that may help inspire a rally. The good news is that if bonds can make a strong break higher, we will see mortgage rates improve to 15 month or better lows.


This morning we received an update on the Producer Price Index (PPI), and it came in below what the market was expecting. Although producer pricing doesn’t necessarily directly impact the consumer inflation levels, it is considered a forward indicator. The big news will come tomorrow when the Consumer Price Index (CPI) report is released. If that shows that consumer inflation levels are below what the market is expecting, we could see mortgage bonds muster the strength to make a break higher. That would help improve mortgage interest rate pricing. However, since a breakout is the exception and not the rule, we will continue to play it safe.


Unless bond prices break above the aforementioned levels, we will maintain a locking bias.

The whirlwind of volatility continues once again today in both the stock and bond markets, as investors continue to digest news of a break down in the progress between the U.S. and China surrounding trade negotiations. Yesterday started with stocks falling sharply just to climb back and close only slightly lower than where they opened. We saw a similar pattern in the bond market, with mortgage rate pricing improving in the early trading hours just to end the day worse off than where it opened. This morning has started off in a similar fashion to yesterday, so the concern will be how the trading goes as the day wears on. If we see a repeat of yesterday, we could once again give up all gains in the bond market.


The trade war battle is beginning to lose credibility in the markets. We have times when investors believe that an agreement between the two countries has been reached, only to learn that talks have once again broken down a short time later. Stock investors have used the progress days to make significant advancements, while only giving up a smaller portion of the gains when talks break down. So overall, the trade talks have been extremely beneficial to stock investors. We will be watching the updates closely and will keep you posted as to the impacts they are having to mortgage interest rate pricing.


Although we are not able to suggest immediately locking, the trend of bond prices falling as the day wears on remains a great risk. With bond prices near the highs we’ve experienced in over a year, now is a great opportunity to lock.

Thanks to a Tweet by President Trump, mortgage bonds received a nice boost this morning.  In Trump’s statement, he threatened that he would raise the tariff on $200 billion of Chinese goods from 10% up to 25%.  It is now rumored that China is considering skipping trade talks and is also preparing more retaliatory economic penalties to the U.S. as a result.  The details of what happened are unclear at this time, but it does seem clear that there is a serious breakdown in the negotiations between the two economic powerhouses.  Given that much of the rise this year in the U.S stock market was a result of assumptions made that the trade war will be soon coming to an end, this could have a more serious impact on the U.S. stock market over the coming months.  For now, the impact isn’t too severe.  However, any drop in the stock market will generally help improve mortgage interest rates.


Following Friday’s Bureau of Labor Statistics (BLS) Jobs Report release, media outlets are raving at the strength of the U.S. economy.  As I discussed in Friday’s market update, the reason for the cheers aren’t quite as strong as they appear to be at first look.  A deeper look shows reasons for concern that are not publicly being addressed.  Although it’s hard to argue the strength of the current labor market, there are plenty of reasons to argue why the factors that make up the numbers could be facing headwinds within the next year.  If you are basing life decisions upon the current environment continuing, just remember that we are at the tail end of an economic expansion cycle and that the next healthy move is for a slowdown.  Markets will always cycle, and there is no reason to think that this will be the exception.


Although there is no need to immediately rush to lock, I feel that now is a great time.  After floating, we are going to switch back to a locking bias.

The Bureau of Labor Statistics (BLS) report showing new job creations in the month of April came in at a staggering 263,000.  This was well above the 185,000 the market was anticipating.


Another component to the report is the Unemployment Rate, which dropped from 3.8% down to 3.6%. Although all of this seems incredible, a deeper look at the reports actually provides hope for lower mortgage rates in the future. Let’s take a look at “why”.


Although the job creation number is strong, much of this is due to part time jobs. This is the time of year when seasonal summer jobs heat up and when we see part time students flooding the job market. Therefore, this should be factored in and taken with a grain of salt.


More important is the drop in the Unemployment Rate. First of all, this fell for the wrong reason. The Labor Force Participation rate just fell to its lowest point since 2001.  This means that the number of Americans working or even wanting to work is insanely low. This isn’t good news for the Trump Administration, which campaigned on President Obama’s low Labor Force Participation Rate, stating that he would get America working again. Well, this hasn’t happened.


In addition, and the biggest reason for hope of lower rates in the future is that history predicts that the job market is about to turn negative. In 100% of times that the Unemployment Rate hit a cycle low, it was immediately followed by a sharp rise and recession. With the Unemployment Rate now at a 49 year low, how much lower can it go?  I’ll tell you, not much if any. This means the next move will be a sharp rise in the number of Americans out of work. There’s no saying when this will happen, but history tells you it’s something you can count on.


With the BLS report behind us, we will take a carefully floating stance.

Mortgage bonds experienced a huge lift after the Federal Reserve announced following the conclusion of yesterday’s FOMC meeting that rates would remain stable and that they would increase their purchases of 10-Year Treasury Notes.  Further, they stated that the lack of consumer inflation was concerning, which seemed to have temporarily set the stage for a rate reduction at some point in 2019.  However, in the press conference that followed, Fed Chairman Jerome Powell provided evidence of inflation through other less-known readings, which then caused the bond market to give up all the gains they experienced immediately after the meeting.  So, needless to say, mortgage bonds are back beneath their 25 day moving average once again.


The sell-off in the bond market that started yesterday afternoon has had some follow through in early morning trading.  Much of this can be attributed to investors taking a safe position in advance of tomorrow morning’s Bureau of Labor Statistic (BLS) report, which will estimate the number of new job gains in the month of April.  While the market is expecting to see a number in the 180,000 range, there are whispers of concerns of a much stronger number on its way.  Given the lack of Weekly Unemployment Claims on the “sample week” that makes up a part of the equation, combined with the strong ADP payroll report, some investors are taking chips off the table.  Once we see the actual number, we will have a better idea of where rates will head in the near term.


Given the risk associated with tomorrow’s BLS report, locking is the safe play.

Mortgage bonds were able to close above their 25-day moving average yesterday, which is a strong technical sign for the near-term direction of mortgage interest rates. The hope is that today’s Federal Reserve announcement and press conference to follow will have a bearish tone, which would help support lower interest rates. Although the Fed is not going to change rates at this time, investors will be looking for any change to the current plan or for the Fed to announce more purchases of Year Treasury Notes or mortgage backed securities. Such a move would help lower interest rates in the future and could help the Fed stimulate the inflationary pressures they are hoping for.


The ADP Employment Report for the month of April was released this morning, and the number came in at a shocking 275,000 new hires. This was well above the 180,000 the market anticipated and could set the stage for a blockbuster report on Friday when the Bureau of Labor Statistics (BLS) is set to announce their estimate. Since the BLS report is far more significant to the markets, we need to be on-guard when that is released. A strong number could push bond prices lower and set the stage for higher rates.


We are going to suggest floating into the Fed announcement today. However, be prepared to lock if the statements are bullish.

Mortgage bonds closed beneath their 25-day moving average yesterday, which was not the outcome we were hoping for. So far today, bond prices have once again bounced above and beneath this critical level, creating a lot of uncertainty as to which direction they will ultimately decide to take. If prices can close above this ceiling, it would help add hope for a bond rally in the days to come. However, if they once again close beneath this level, the ceiling will gain strength and bond prices could then head lower to test the floor of support. Until bonds can choose a definitive direction, we will just remain in suspense.


The Federal Reserve begins their two-day meeting today, with the interest rate and policy announcement set for tomorrow at 12:00 PM MST. The Fed will not be raising interest rates. However, investors will be listening intently for statements that could indicate how the Fed is feeling about the current economic path and whether Fed members see a recession in the months to come. Many economists believe we will avoid falling into a recession. However, history is the greatest predictor of the future.  To me, it seems irrational to say the US will skip past the typical economic cycle. Therefore, anticipate a recession around the corner.


Unless bond prices can make a decisive break above their 25 DMA, we will maintain a locking bias.

After closing above the 25-day moving average on Friday, mortgage bond prices have been fighting this critical level all morning. Prices have been bouncing from being on top to beneath this level like a ping pong going back and forth. My guess is that bond prices will fall to the point at which they closed on Thursday, as that would close the gap-up opening they experienced on Friday morning. After this happens, they may resume their climb higher and hopefully once again close above their 25 DMA. If not, however, prices will likely remain stagnant, trading in the range between their 25- and 50-day moving averages. Today will be another important day for the near-term direction of mortgage interest rates.


The news of the day has been generally bond-friendly, highlighted by the Fed’s favorite gauge of consumer inflation. The Headline Personal Consumptions Expenditures (PCE) report showed that consumer inflation increased on an annual basis from 1.3% up to 1.5%. However, the increase was entirely from the cost of oil increasing. In fact, the Core Rate (which excludes food and energy prices) decreased, moving from 1.7% down to 1.6%. This is well below the Fed’s target rate of 2%, which is good news for mortgage interest rates. If we see consumer inflation remain low, we can expect for rates to do the same.


It is still too early to say which way mortgage rates will head. Until a clear direction is established, we suggest a locking bias.

After mortgage bond prices broke out of a downward trend, prices have broken above their 25-day moving average. The key concern at this point is whether they will maintain the strength to stay above this critical level. The move puts bonds in a nice technical position that could lead to mortgage rates moving back down to the lows we saw back at the end of March before rates started to tick higher.  At the moment, this is great news for mortgage interest rates, which improve as bond prices strengthen. If prices can close the day today at current levels, we could see some follow through next week. So, let’s cross our fingers and hope that bond prices don’t lose steam as the day wears on.


Today’s GDP report showed that the U.S. economy grew at a 3.2% pace in the first quarter of 2019. Although this is an exceptionally strong report, a deeper look shows that it was largely due to government spending and a huge stockpile of corporate inventories that were solely to protect against massive tariffs that were coming. Neither of these are the types of reasons we like to see as rationale for strong GDP growth. In fact, the consumer sales component of the report came in at a 6-year low.  This is not a good sign for the strength of the economy. Overall, bond investors are seeing right through the headline report which is why bond prices are rising vs falling.


Now that bond prices are above both the downward trend line as well as their 25-day moving average, there is no need to rush to lock. However, it’s uncertain whether prices will be able to maintain. So, if you float, do so only if you can closely watch the markets.