Mortgage Mike’s Daily Rate Commentary

Stocks have started the day weaker, failing to continue to build upon the positive momentum the market experienced yesterday. The weakness in the market today is being blamed on President Trump stating there is little hope that the US will delay an increase in tariffs on products imported into the United States from China. The 10% tariff is scheduled to move to 25%, which will deter a significant amount of imports being purchased by US buyers. Overall, this is a negative thing for Americans’, as it will drive prices higher on many of the goods US consumers purchase. This will add inflationary pressure to the market, which is not good for mortgage interest rates.

 

The recent announcement from GM stating they intend to lay off up to 15% of their salaried workforce, has sent tremors through the markets and has put President Trump on the defense. Prior to being elected, he promised to bring back many of the car manufacturing jobs that have been lost over the past decade. This announcement has created an uptick in criticism towards the President. In turn, he announced that he is considering eliminating electric car subsidies for GM. With many car companies now focusing on the transition out of gas engines into electric, this could be more of a trend going forward.

 

With stocks struggling, there is no immediate need to rush in and lock. However, stocks remain just beneath an important ceiling of overhead resistance, therefore, the safe play is to maintain a locking bias.

After taking a shellacking last week, the stock market bounced off the floor of support we have been talking about. We are now moving higher in early market trading. This expected move could lead to a nice rally for stocks as we close out 2018. December tends to be a good month for the US stock market. If stocks can break out of their strong downward trading channel, the next significant ceiling is the 25-day moving average. Although this level is not generally considered to provide a strong level of resistance, it has proven to be more difficult in recent weeks. The true sign would be a break above the 200 DMA. That would be needed to change the opinion of stock market skeptics who believe we are in the early stages of a bear market. I happen to fall into this category. A break above the 200 DMA would help sway my opinion.

 

Although today is a slow day for scheduled economic reports, the week heats up as the days roll on. Much of the news of the week will be on the housing industry. Given that October was the month in which we saw an up-tick in mortgage interest rates, it will be interesting to see if this increase has had an impact on the strength of the housing industry. If you follow this blog, you know that I’m a bit of a pessimist when it comes to the near-term direction of home values. I just don’t see both mortgage interest rates and home values being able to sustain the current pace of increase. I believe that we will either see a softening in mortgage interest rates, a softening in home values, or both. I don’t see our market being able to sustain both at the same time.

 

After switching back to a locking bias last week, I feel the path remains prudent. Unless mortgage bonds can break above their 50-day moving average, we can expect pricing to get a bit worse in the days to come.

Yesterday’s market update was spot on, with stocks bouncing off the floor that was identified, leading to added pressure in the bond market. I don’t anticipate stocks making much of a come-back. My guess is that they will continue to bounce between the current floor we identified and the 25-day moving average that has proven to be a stronger ceiling of resistance than it generally has been. The stock rally has more room to continue, so I anticipate upward pressure to mortgage interest rates continuing today.

 

Over the past several years, the US stock market has been extraordinarily resilient. The strength continued to build even in times of political and economic uncertainty. Lately, however, it sees that stocks are reacting to even the slightest hint of bad news. When the economy shows signs of a cold, the stock market attracts pneumonia. This is a sign of weakness which could be a pre-curser to stocks entering a bear market in the weeks / months to come.

 

I want to reiterate that I believe the Fed will have a harder time continuing the gradual rate hike process that they are now on track to do. With a December rate hike still anticipated, that could be the breaking point that inverts the yield curve. That would certainly impact the Fed’s outlook on hiking in 2019. We will have to see how this plays out. But I don’t think it will be in the overall best interests of the economy to continue the path until the stock market has stabilized.

 

We will continue to suggest a locking bias in the near term.

Stocks are once again down sharply in early morning trading. However, the stock charts show a strong floor of support not too far beneath current levels. The interesting thing about the dramatic drop stocks have experienced in recent days is that bonds have not had the typical benefit one would expect when stocks are under extreme pressure. This is not a good sign for the bond market, which typically sees a massive influx of money pouring in during times of stocks struggling. The concern will be pondering what would happen if stocks hit the floor and bounced higher. My guess is that we will see investors sell off bonds to jump into the stock market. That could temporarily hurt bond pricing, adding upward pressure to mortgage interest rates.

 

Markets are beginning to panic as many investors lose hope of a late 2018 year-end rally. It seems that investors are now more focused on preserving assets vs chasing high yields. This defensive approach seems to be a wise choice, as many indicators signal trouble ahead. Clearly, the Federal Reserve is watching what is happening. It will be interesting to see if the Fed will continue to hike short term interest rates. My guess is that if they do, December may be the last hike we see in the near term. Any additional signs of slowing should cause Central Bankers to hold off in fear of the US economy experiencing a hard landing.

 

As we wait and see what happens in the stock market, I’m beginning to favor a short-term locking bias.

Following another failed attempt to break above its 100-day moving average, the stock market is taking deep losses once again this morning. The stock market’s inability to break above this moving average is a sign of weakness that could become a more significant problem in the days and weeks to come. I personally believe that we are in the late stages of a bull market and even possible the early stages of a bear market. The 200-day moving average is the general indicator of a trend reversal. Stocks went several years without making a decisive break beneath this critical moving average. In recent weeks, stocks have decisively broken this barrier and remain unable to muster the strength to get back above. Could this be the end of one of the longest lasting bull markets in the history of the stock market? I believe it is entirely possible. This is good news for the longer-term direction of mortgage interest rates. Now is a great time to consider a no-cost mortgage when the time comes to lock in a rate.

 

Both the stock and bond markets are starting to see the reality of a pending recession. In looking back on economic history, there are plenty of parallels to historic pre-recession markets and today. I compare the current housing and stock markets to those of 2006, just prior to the near economic collapse we experienced from the last recession. We are now starting to see home builders come to grips with this reality, as well as other industries who are impacted during recessionary times. Let’s hope the Fed can raise rates a few more times before things get too bad.  Otherwise, they will be limited as to the tools they can deploy to help the next recession not become overly extreme.

 

Although the stock market is under significant pressure, mortgage bonds aren’t showing the level of improvement you’d otherwise expect to see. If bonds can break the current ceiling that is holding them back, we could see a dramatic improvement to mortgage interest rates. In the meantime; there is risk of bonds being pushed lower. If you can closely monitor the markets, you can carefully float. However, if you aren’t a risk-taker, now is a great time to lock.

Stocks are still lacking the strength to break above their 25-day moving average, which is currently helping improve mortgage bonds. Even if stocks eventually break above this level, they will have the 200 DMA to contend with almost immediately afterwards. The more time stocks spend beneath this critical level, the weaker stocks will become and the more volatility we can expect to see. With many now coming to the realization that we are within a year or two of being in a recession, we can expect to see less enthusiasm over the current economy and more of a cautious approach to help set up for the economy we are heading into.

 

One of the most fascinating realities of the current economy is that the Fed is committed to continuing their path of gradual rate hikes despite the fear of a recession. With the U.S. economy now having 37 quarters of economic expansion, which is nearing the longest run in history, even the Fed knows that their approach is expediting the path to a recession. However, they want to be in a position of being able to use rate drops to help spur the markets when the time comes. This means they need to adjust rates higher in order to have enough fire power to positively impact the markets. So as the yield curve begins to invert, just know that lower rates will eventually follow. Therefore, consider a no-cost mortgage so you can take advantage of future opportunities when they arise.

 

If stocks remain beneath their 200 DMA, you can cautiously float. If they reverse, consider securing a rate.

Mortgage bonds continue to trade within a tight range, as markets look for direction from the stock market. Although stocks are trading higher in early morning trading, there are the 25- and 200-day moving averages just above current levels. This means we will likely see stocks stall out here at some point today, as there isn’t likely enough good news to push stocks above the multi-layer ceilings. This could present an opportunity for mortgage bonds to improve, as many investors will temporarily shift money out of the stock market and into mortgage bonds. However, we still aren’t out of the woods. Stocks could make a strong come back in the days or weeks to come, which would likely drive mortgage interest rates to set new multi-year highs.

 

The consumer price index (CPI) for the month of October was reported this morning, showing a year over year increase in overall consumer inflation from 2.3% up to 2.5%. However, after adjusting for food and energy prices, the Core rate fell from 2.2% down to 2.1%. Since both components of the report came in as the market anticipated, there was very little reaching in the bond market.  This is good news considering that tariffs are driving more products being produced here in the US, which is generally more expensive than products produced in China. If the production prices in the US continue to climb higher, we can anticipate that will eventually lead to higher prices charged to the consumer. Overall, tariffs are inflationary and not friendly to mortgage interest rates.

 

With mortgage bonds having room to improve, there is no need to immediately lock. However, we need to be careful of the longer-term outlook. If stocks can muster a strong relief rally, that will come at the expense of mortgage interest rates.

Stocks are significantly higher in early market trading this morning, as they attempt to recoup the heavy losses they absorbed yesterday. The 600+ point loss the DOW took yesterday was supposedly fueled by fears of a soon to be democratic House pursuing further investigations into President Trump’s ties to Russia and whether there was collusion. The losses pushed stocks back beneath their day moving average, which could not serve as a ceiling of resistance as stocks attempt to climb higher. This could provide an opportunity for the bond market, assuming stock are not able to break above this critical level. It could mean that more losses are in store for the stock market.

 

The good news of the day is surrounding hope that the trade disputes between the US and China will soon be minimized, on reports that China’s Vice Premier Liu He will ensure a meeting between the leaders of the two biggest economies in the world. Given that trade war concerns have been the cause of massive swings in the US stock market, it seems that a resolution between the two major economies would help provide some stability for stock prices. In the meantime, we will continue to deal with the swings in hopes of an agreement to be made soon.

 

With mortgage interest rates still grinding against the ceiling of multi-year highs, there is great risk in floating. As a result, we will maintain a locking bias.

After a failed attempt to break above its 100-day moving average, the stock market is taking losses in early morning trading. This is helping support mortgage bond pricing, which typically moves in opposition of the stock market. This is somewhat surprising considering this morning’s Producer Price Index (PPI) report showed that inflation on the producer side was much higher than the market anticipated. Although Producer inflation doesn’t necessarily trickle down to the consumer level, it is certainly a strong forward indicator of higher consumer inflation. We will find out Wednesday when the Consumer Price Index (CPI) report is released.

Yesterday’s Federal Reserve announcement was just as planned, with the Fed opting not to hike rates at this time. However, as we feared, the short announcement made by the Fed following the release confirmed the path of continued, gradual rate hikes and sets the stage for one final hike in 2018 when the Fed meets next in December. The scary thing about this next hike is that it could be the one that inverts the yield curve. History shows that once a yield curve is inverted, a recession is imminent to follow within a year or two. Although I don’t agree with the Fed’s decision to continue hiking, there certainly is enough inflation concern to justify the move. I feel that a recession is already imminent, and further rate hikes will expedite the process and cause it to be a harder recession when it does hit. We are not in the uncomfortable space where the general population hasn’t accepted the reality of a pending slow-down, so it continues to pressure the economy into irrational levels. That will soon change.

Although bonds are performing well this morning, there is little hope of prices making significant gains today. We will maintain a locking bias.

Mortgage bonds are near flat for the day, as they dangerously ride along at the lowest levels we have seen in more than seven years. Since this translates to the highest mortgage interest rates have been in more than seven years, this isn’t a good position to be in. At the close of the market today there will be a bond coupon rollover. This is significant because it likely will push the price of mortgage bonds below the seven-year low, which is significant only from a technical picture. At the end of the day, we need to plan for mortgage interest rates to climb even higher in the months to come.

 

The Federal Reserve is set to announce their interest rate decision today. Although there is no chance of a rate hike being announced, it is likely that they will set the market up to anticipate a hike when they meet next in December. If this happens, which I believe it will, this will be the fourth interest rate hike in 2018. Since the market was only expecting a total of three hikes this year, the additional hike could have a greater impact because not all investors priced that into the market beforehand. This could cause the 10 Year Treasury Note yield to step up even higher, which will likely trickle down to higher mortgage interest rates as well.

 

With the technical picture not looking good for mortgage bonds, we will maintain a locking bias.