Mortgage Mike’s Daily Rate Commentary

Stocks have not only broken above their 200-day moving average, they have made a dramatic leap above this critical level. We’ve anticipated this move since stocks made their first multi-week break beneath their 200 DMA for the first time in several years. We will now have to wait and see if the run higher in stocks pushes prices up to once again challenge new all-time high levels. Given the traditional patterns of the stock market, stocks should run up to at least their 100-day moving average before hitting significant resistance. A break above that level will likely trigger a rally that could set fresh all-time highs.

 

Mortgage bonds are also performing well today, which goes against the traditional pattern of stocks and bonds performing in opposition of each other. The challenge for the bond market will be whether it is able to break out of the downward trading channel that has been in place for roughly the past two weeks. I think the strength of the stock market will end up taking a toll on the bond market, so my hopes of making a decisive break out of this downward trading channel aren’t very strong. I suspect bonds will face a strong ceiling and bounce lower in the near term. This would cause upward pressure on mortgage interest rates. Hopefully, I’ll be proven wrong.

 

Given the ceiling of resistance just above current levels, I feel a locking bias is prudent.

The US stock market came out of the gates strong this morning, looking to once again challenge its 200 day moving average.  Since stocks have found stability just below this critical moving average, there will likely be very far fewer sell orders triggered as stocks run up against this level.  However, I don’t anticipate stocks to break this level upon their next attempt.  I suspect it will take a few more tries before there is much hope for stocks to make another significant run.  When this does happen, we can expect to see a significant headwind on the mortgage bond market, which could push mortgage interest rates to set new multi-year highs.  Be on guard and watch the market closely if you are needing to lock a rate in the near future.

 

Today is an important day for both the stock and bond markets, with mid-term elections and a Fed interest rate decision both slated on the calendar today.  Although there is zero chance of a Fed rate hike, markets will closely be listening for any change in verbiage following the Fed statement.  As for the elections, Democrats are feeling confident they will take the Senate back, which could cause a headwind for President Trump and the execution of his agenda.  The stock market could react negatively to a Democratic win, which could help support bond prices tomorrow.  In the meantime, markets will likely be hesitant to make any significant moves.

 

Given the unknowns of the election reaction, we will maintain our locking bias.

Mortgage bonds are hanging in so far this morning, holding mortgage interest rates right at more than a seven-year high. This is an uncomfortable and critical position for mortgage bonds to be in. If bond prices fall beneath current levels, we could see bond prices make another large fall. Since bonds are now in waters that haven’t been chartered for more than seven years, we must go WAY back in time to find support that could slow the price drop. Let’s hope prices hold and gain positive momentum from here.

 

Stock prices are holding near flat-line this morning, holding just beneath their 200-day moving average. I would expect stocks to make another run at this critical level at some point this week. My guess is that they will eventually make it above this level, even if they first must go through a couple more failed attempts. When stocks do exceed this level, that will add a significant headwind to the bond market, as investors will likely sell bonds to take advantage of the opportunities of the stock market. That could be the catalyst for mortgage interest rates to set new multi-year highs.

 

With bond prices holding, there is no need to immediately lock. However, I see little hope of rates making significant improvements. Therefore, we will maintain a locking bias.

Mortgage interest rates are setting new 7-year highs this morning, fueled by a much stronger than anticipated report from the Bureau of Labor Statistics (BLS) on the number of new jobs created in the month of October. While the market was expecting only 188,000, the actual number came in at 250,000. It’s surprising to me that the estimate was as low as it was. When you consider that retailers are adding staff to support the holiday shopping demand and that the three-month average number of new hires is 218,000, the number anticipated should have been higher than it was. Hopefully, November’s estimate will be higher to reflect the reasons referenced above.

 

The US stock markets hit their 200 day moving averages and were immediately pushed lower. This is largely due to pre-programmed sell orders that triggered just before stocks hit this critical level. With nearly 1/3 of the market passively invested in funds that track the index, the ease of predicting such moves has become simple. I believe it will take the stock market at least three attempts before it has a shot of breaking above this level.

 

Another key concern in the BLS report was the Average Hourly Earnings, which increased from 2.8% to 3.1%. This climb higher is a pre-curser to higher overall inflation, as wages are one of the greatest determining factors in predicting the direction of near-term inflation numbers. Since inflation is the arch enemy of mortgage bonds, this is not good news for mortgage interest rates going forward.

 

We will clearly maintain our locking bias.

The stock market continues to recover their losses this morning, inching closer and closer to its 200-day moving average. Once it hits this critical level, stocks will face a challenge that could dictate whether stocks are truly in the beginning stages of a bear market or if this was just a short-term correction that will help stocks build the strength to eventually set new all-time high levels. Although I am long term bearish on the US stock market, I’m not yet convinced that now is the time when the trend will reverse. I see a 60% probability of stocks building strength and continuing to climb higher. However, my guess is nothing more than that, a guess.

 

Tomorrow is a HUGE day for both the stock market and for mortgage interest rates. It is the day when the Bureau of Labor Statistics releases their estimate of new job creations for the month of October. Part of the reason I’m leaning towards stocks recovering all their losses is that I feel the odds are probable that the report will show a stronger than expected labor market. When you consider that we are heading into the strongest retail season of the year, it seems likely that many will have already started to hire to have enough trained staff by the time consumers hit the malls for their holiday shopping. I will let you know the results in tomorrow’s market update.

 

Although bonds are performing well today, we feel it is prudent to lock in ahead of tomorrow’s report.

It’s another strong day for the US stock market, with the S&P 500 currently 50 points higher on the day. More importantly, they are now within a stone’s throw of their 200-day moving average. Given that stocks have spent very little time beneath this critical ceiling of resistance, they could easily be pushed back above. That would likely trigger an even stronger rally in the stock market, which I feel is a probable occurrence. Much will depend upon the results of Friday’s Bureau of Labor Statistics (BLS) report that will be released on Friday. If the results show an exceptionally strong labor market, that could provide the needed trigger for stocks to rally.

 

This morning’s ADP report showed that 227,000 new jobs were created in the month of October. This is much higher than the 178,000 the market was anticipating and could set the stage for a strong BLS report on Friday. It seems that recent months have shown the BLS report to be lower than ADP. We could see a “make-up” month where the BLS report comes in even higher than ADP. We must be on guard in case this happens.

 

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

The indecisiveness in the stock market continues, with markets making wild swings in both directions. Yesterday was a prime example, with stocks opening strong just to experience a dramatic fall before the close of the market. So far today, stocks have already moved from being down to making massive gains. Overall, the volatility in the stock market isn’t a good sign for the near-term direction of the markets. Volatility can be a pre-curser to a more dramatic fall that I believe we will be experiencing at some point. To me, it’s not a question of if, only a question of when.

 

It’s Jobs Week, with ADP set to announce their estimate of new job creations in the month of October tomorrow, and the Bureau of Labor Statistics to announce theirs on Friday. It seems that the report could come in strong based on some of the data points that factor into the report being exceptionally strong. If that is the case, it will add upward pressure on mortgage interest rates. Since bonds are heading into this report just beneath a strong ceiling of resistance, there is more room for rates to move higher than being likely to decline. Not a good technical picture to face just prior to a job report release.

 

The US housing market continues to show signs of slowing. However, there is a big difference between a negative report vs just a slowing report. Home prices are still increasing, albeit at a slower pace.

 

We will maintain a locking bias.

The back and forth trading patterns continue in the US stock markets with today being a day of significant gains for equity investors. With each turn in market sentiment comes new rhetoric out of news pundits. Today, the focus is on the positive events happening. However, this market volatility is largely based on the technical outlook, as markets bounce from support to resistance. This is a day trader’s dream, with great opportunity being created in both the down and up markets. With mortgage bonds hitting their 100-day moving average, the current technical picture for mortgage interest rates is not looking good for the day. I’m sure tomorrow will be entirely the opposite.

 

The US is preparing tariffs on all remaining imports from China into the United States. Should the meeting between President Trump and Chinese President Xi Jinping fail to ease the trade war, the tariffs will go into place. This move seems to be a strategic one by President Trump to establish his expectations for the meeting ahead of time. With China’s president now aware of the potential consequences, hopes are that he will bend to the demands of President Trump to help avoid further negative economic impacts.

 

The bond market has a strong ceiling of resistance to contend with. We will suggest a locking bias.

Yesterday’s stock recovery didn’t last long, with stock markets up dramatically in early morning trading. With stocks now having four days of closing beneath their 200-day moving average, we can now consider this a “decisive” move beneath this critical moving average. Although this doesn’t mean stocks won’t rally back and overcome this level in the near term, because that certainly is possible, it does mean that such a move is becoming less likely. The 200-day moving average will now serve as a ceiling of resistance that could prevent stocks from making significant gains. Since it has been several years from the last time stocks were in this position, this is not good news for stock investors. In fact, a decisive break beneath this level generally signals a trend reversal, meaning this could be the beginning stages of a bear market.

 

Considering the recent stock market declines of the past three weeks, President Trump has sharpened his criticisms of Fed President, Jerome Powell, and his strategy of continued interest rate hikes. In recent days, several critics have jumped on the band wagon, pleading for the Fed to hold off on future rate hikes. President Trump’s policies of reducing tax rates and corporate regulations have led to a hiring binge that has pushed employment levels beyond a healthy rate. Without the Fed countering the impact, we could otherwise see inflation numbers well beyond what is healthy. Further; to keep up with the increasing Federal budget deficit, which was fueled by lower tax rates, the amount of money the government is forced to borrow to meet its obligations is driving market interest rates higher. The lessons to be learned is that there is a counter balance to everything. If you want to over stimulate one sector of the economy, it must balance out by impacting another. With inflation being one of the most destructing components of a healthy economy, it must be countered with higher rates. With the US on the brink of a recession, higher rates and inflation are terrible. This seems to be where the current economic environment is heading.

 

If stocks continue to weaken, we could see mortgage interest rates improve. If you choose to float, do so only if you are able to keep a close eye on the market, as things can reverse quickly.

After getting hammered yesterday, stocks are trying to recover their losses in early morning trading. Currently, stocks have recovered approximately ½ of the total losses from yesterday and are still climbing higher. The past three weeks have been rough for stock investors, with all of 2018 gains being lost by end of trading yesterday. However, I still feel as if we will see a significant recovery in the stock market in the days to come. If I am wrong, which I am often 😊, that would be great news for mortgage bonds. When stocks get back to their 200-day moving average, the key to the longer-term outlook will depend upon whether they are able to get above this critical level. If they succeed, look for upward pressure on mortgage interest rates.

 

President Trump continues his outspoken rhetoric against Fed Chairman Jerome Powell for his determination to continue hiking short term interest rates. Trump believes the higher rates will force the US into a recession. To me, a recession is imminent. Rapidly increasing rates will contribute to making that happen sooner. However, without the rate hikes, the pro-growth policies of the Trump administration will lead to damaging levels of inflation that would be significantly more hurtful to the United States in the long run. Further, with the Federal Reserve dramatically reducing their purchases of US debt, now is a terrible time to have policies that push the deficit levels into the highest levels in US history (fueled by tax cuts). That will push market driven interest rates, such as mortgage rates, higher regardless of what the Fed does.

 

Stocks continue to climb higher, so we will maintain our locking bias.