Mortgage Mike’s Daily Rate Commentary

Stock prices are climbing higher once again in early market trading, getting closer to approaching the 200-day moving average. This is a dangerous time for mortgage bonds, as a stock market break above this critical level would translate to higher mortgage interest rates in the near term. The key concern is that if the republicans and democrats can successfully negotiate a deal that will avert a second federal government shutdown, stock investors would see that as a positive sign for opportunities for the stock market to advance higher.

 

This is a relatively slow week for economic news, so markets will trade heavily based upon the technical outlook. At this point, the technical outlook isn’t looking great for the mortgage bond market. However, I see this as a temporary problem for interest rates. With a recession looming, more and more investors are starting to see the writing on the wall. With the Fed not having a lot of room to lower rates, the impact of a recession could be prolonged. In the long run, I see lower rates. In the meantime, take advantage of a no-cost loan if you can. Now is a great time to make the first step lower.

 

Given the strength of the stock market, we will maintain a locking bias.

The technical move in the stock market continues to drive prices further away from their 200-day moving average, which is great news for mortgage interest rates. This level is the most influential of all moving averages, and a break above this could set off a massive stock rally that could push mortgage interest rates higher. Since the ceiling has held so far, mortgage rates now have a nice tailwind behind them, which will hopefully lead to softening rates in the near term. However, we still need to be cautious, as stocks could reverse course and break above this critical level. Although I don’t believe that will happen, it remains a risk.

 

Global growth concerns continue to build steam, with more and more economists jumping on the Recession 2020 band wagon. I remain steadfast in my belief that both housing prices and mortgage interest rates cannot continue to grow at the pace both are projected to climb by. I believe one or both will fall. This goes against what nearly every economist believed just a couple of months ago. However, as time passes, more are aligning with this point of view each day. This will likely present a great opportunity for people who obtained a mortgage in the past year to make steps lower using our no-cost refinance model, which is the best strategy in a reducing interest rate environment.

 

Mortgage bonds have a little room to improve before hitting the next significant ceiling of resistance. Since the potential improvements are limited, there is little benefit in floating. If you do choose to float, do so only if closely monitoring the markets.

The 200 day moving average held stocks back from continuing their gains, which is great news for mortgage bonds. As long as this critical ceiling of resistance holds for the stock market, mortgage bonds should see improvements in the near term. However, stocks remain close to this level, which means they aren’t yet ready to claim defeat. We could see stocks make another run in the next couple of days to once again challenge this level. Unless we see a massive downward run in stocks, mortgage interest rates remain at risk.

The recent gains in the US stock market have widely been attributed to hopes of a trade deal between the US and China. Since this rally has been based on rumor, my thought is that we may see a sell off in the stock market when an actual deal is announced. Stock markets often trade based on what is expected, then reconsider their positions after the changes are formally announced. This is where the term, “Buy the rumor, sell the fact” comes into play. If this happens, it could provide the much needed boost the bond market needs to push mortgage interest rates even lower. I see good things ahead in the mortgage market.

With stocks remaining in risky territory, we will maintain our locking bias.

Today is a slow day for scheduled economic news, so the technical factors will once again drive the direction of the markets. This puts stocks in a strong position, for the moment. The concern is that stocks are now right up against their 200-day moving average. A break above this would not only be terrible for mortgage interest rates, but it would also represent another trend reversal. It has been many years since stocks have spent a considerable amount of time beneath this critical moving average. I believe it is time for stocks to soften. If they do manage to break above this level, I don’t think it will last too long. As more and more people are realizing the risks of a pending recession, investors, employers and consumers will all begin to take steps to prepare.

 

Tonight’s State of the Union could add volatility in the market’s tomorrow. Depending upon the direction President Trump goes, we could see either celebration or panic heading into tomorrow’s trading. It seems at this point that the President will not seek emergency funding for the boarder wall, which could mean that he will also give up the battle over the Federal government shutdown looking later this month. It seems that democrats remain unwilling to sign off on funding the wall, so another shutdown could just further hurt President Trump. This would be viewed as good news for the stock market, as a federal shutdown is not a good thing for the U.S. economy.

 

Given the risks of stocks advancing above their 200-day moving average, we will maintain a locking bias. We will assess the situation once again tomorrow and see how tonight’s speech will impact the near-term markets.

The technical move lower is continuing once again today for mortgage bonds. The good news is that there’s significant support just beneath current levels. If stocks don’t make a wild run higher, odds are that the support will help prevent bonds from falling much further. However, if support does give way, bond prices will take a big drop lower before hitting the next floor. Although I don’t expect that to happen, it is certainly a possibility.

 

As we unpack the data from last Friday’s Bureau of Labor Statistics (BLS) report, there are some signals of concern. First, I’m having a difficult time believing that the job market growth figure was not somehow tied to the federal government shutdown. Although I haven’t heard a single economist mention this, I can only assume that many furloughed federal workers took temporary employment elsewhere in order to put food on their tables when they were not working or getting paid. I will have to see next month’s report to see if the growth was legit or an anomaly. The key indicator that I’m watching out for is the Unemployment Rate. Immediately following the low point in an employment cycle, this rate has spiked significantly higher. Since we know that after hitting 3.8%, there is little room for continued improvement. Further, there is no reason to believe this cycle will be any different from all of those before.

 

Although I’m hopeful bond prices will hold, the safe play remains to maintain a locking bias.

The bond market is falling sharply today, adding upward pressure to mortgage interest rates. Although this is also a technical move lower (which I will explain in a minute), the market is reacting to the Bureau of Labor Statistics (BLS) report that showed there were 304,000 new jobs created in the month of January. Since this far exceeded the 158,000 anticipated, bond investors are clearly nervous about this headline report. Although there were negative revisions to the tune of 77,000 to the prior two months’ reports, the strength of the labor market is one key component the Fed looks at when deciding the rate strategy, and this component of the rate decision clearly supports higher rates.

 

In looking at the bond chart, mortgage bond pricing hit up against a strong ceiling of resistance provided by the 50% Fibonacci level. Since this is a standard stopping point in a market rally, (such as the one we have experienced in the mortgage bond market the past couple of months) a break above this would be a rare exception. Although I do believe we will eventually break above this critical level, I don’t see that happening without a very weak piece of economic or political news hitting the market. Since we knew the job number would at least come in ok, we could easily assume the next step would be for rates to deteriorate a bit in the near term.

 

We will take a deeper dive into the report in our market update on Monday. There are some key points of concern that we will analyze.

 

We will maintain a locking bias.

Financial markets got exactly what they were hoping for yesterday, with the Federal Reserve removing the language of “gradual rate hikes” from their dialogue. This came as a surprise to many economists who were expecting to see four rate hikes in 2019. Based on this, we can expect to see the Fed hold rates at current levels until there is enough economic data to support making a change in one direction or the other. Given the unknown implications of Brexit, the trade war with China, ongoing investigations into President Trump’s election and the implications of a government shutdown, I believe we will see rates have more stability, at least through March. This is great news for homebuyers looking to move when the purchase season heats up.

 

Tomorrow is another big day for the financial markets, with the Bureau of Labor Statistics (BLS) set to announce their estimates of new job creations in the month of January. Despite a strong report out of ADP, markets are only expecting to see a number around 158,000. This is well below the current trend of job growth. However, there are many factors this month that could have taken a toll on the labor market. For one, there were many private companies significantly harmed by the government shutdown. This could have adversely impacted the growth rate of new hires in January. Further, the first quarter of a new year generally doesn’t support strong growth. Therefore, this report could come in low.

 

Although the bond market is performing well today, the risk of tomorrow’s report is high. Given the risk, I’m going to maintain a locking bias.

Stocks are making a technical move higher, after bouncing off the floor of support. Overall, stocks are trading within a tight range as they look for reasons to make a break in one direction or the other. The outcome of which way they will go could be heavily influenced by the statements that will be made by the Federal Reserve at 2:00 pm EST. If the Fed backs down on future rate hike predictions, which I believe they eventually will, the stock market will celebrate that news. This will add upward pressure to mortgage interest rates as many investors will likely sell their bond holdings to invest in the higher potential gains offered by stocks.

 

A strong ADP report shows that job gains in the month of January came in at 213,000, which far exceeded the market’s expectations of 174,000. Of this total, 145,000 were added in the service sector alone. This is a strong indication for consumer spending, which heavily influences the direction of mortgage interest rates. This number now sets the stage for a stronger than expected report on Friday when the Bureau of Labor Statistics (BLS) will announce their estimate of new hires. Since the BLS is the more respected of the two, that one has a greater influence on mortgage rates, so we need to be careful as we head into that report.

 

With mortgage bonds under pressure, the safe play is to maintain a locking bias.

Both the stock and bond markets are relatively flat so far this morning, as the market awaits the results of a bond auction that could influence the markets in one direction or the other. In terms of economic news, today is relatively light. However, we did get an updated report on Consumer Confidence, which showed that consumers are feeling less confident than the month prior and less than the markets anticipated. In addition, the Case Shiller Index showed that the pace of home value appreciation is also slowing. This is a healthy move lower, as the past pace is not sustainable long term. This will continue to slow as the months progress.

 

President Trump has an important meeting with leaders from China today to talk about a solution to end the on-going trade battle. It was discovered recently that China violated US imposed sanctions on Iran. This could add to the volatility of today’s meeting. Later in the day, as news of the outcome of the meeting is released, we could see markets react. So, we must be on guard.

 

Tomorrow is a big day for the markets, highlighted by the Fed announcement coming at noon, MST. My guess is that the Fed will show it is softening its stance against raising rates, which could help mortgage interest rates. However, anything is possible.

 

Although there is no reason to rush to lock, mortgage bonds remain within a sideways trading range. Unless bonds breakout to the upside, this will limit the potential overall improvement. The safe play for those needing to close in the coming days remains to take a cautious approach and either lock or closely watch the markets.

Although today is a relatively slow day for scheduled economic reports, the week overall is an important one for mortgage bonds. Several key reports will be released that will heavily influence the near-term direction of mortgage interest rates, including a Fed meeting, employment reports, housing news as well as reports on consumer inflation.

 

The Federal Reserve’s two-day meeting will begin tomorrow morning, with the interest rate and policy decision due at 12:00 pm mountain time. We don’t at all expect the Fed to raise interest rates. In fact, as we have been saying for many months, we feel there is a chance we will see rates drop in 2019, and/or a change to the Fed’s balance sheet reduction plan. Either of which would be good news for mortgage interest rates, which have risen sharply since the Fed started the path of higher rates.

 

After hitting up against the strong ceiling of resistance on Friday, stocks have once again retreated. Today’s move lower is very much a technical one and is a good sign for mortgage interest rates. If stocks do break above this ceiling, we could expect rates to inch higher. However, if this level holds, we should see stability at current levels.

 

I see very little potential benefit of floating for those needing to close in the coming days. In such case, we will maintain a locking bias.