Mortgage Mike’s Daily Rate Commentary

The Federal Reserve released their Meeting Minutes from their last FOMC Meeting today. The most interesting part of the release showed that the Fed is unsure as to what the next step in their monetary process will be. In fact, they are not certain whether there will be any rate hikes in 2019, which is a bit more bullish than the market’s assumption that there will not be any hikes at all this year. The challenge is that although we are clearly at the end of an economic expansion cycle, there is a great deal of uncertainty as to whether the economy will strengthen to the point to where continued rate hikes are justified. This is an uncertain state for the stock market, and as we know, stock investors like certainty.


So far today, both stocks and bond markets are performing well. They are both responding to the Consumer Price Index report for the month of March that shows that the Core Rate of consumer inflation dropped from an annualized rate of 2.1% down to 2% even. This is good news for mortgage interest rates, which soften under times of tame inflation.


Given the news of the day, there is no reason to immediately rush in and lock. However, keep a careful eye on the markets and be prepared to lock should sentiment worsen.

Mortgage bonds are flat in early morning trading, while stocks are down slightly. Although today is a relatively quiet economic news day, there are several Fed speeches and an update on the Consumer Price Index (CPI) report, each of which could impact the direction of mortgage interest rates.


This week’s CPI report is expected to show that the headline inflation number increased from 1.5% up to 1.8%, while the core rate is expected to remain stable at 2.1%. Any deviation from the expected could either positively or negatively impact rates. The primary reason behind the significant uptick in the headline number is due to oil prices jumping to 5-month highs. This adds inflationary pressure to the market, which creates a headwind for mortgage interest rates. As inflation heats up, mortgage rates follow. So hopefully, we will see a final number that is below that which is currently anticipated by the market.


We need to closely listen to the Fed as they complete their speeches this week. President Trump is once again speaking up about the need for the Fed to lower interest rates to help further stimulate the economy. Trump was clearly right when criticizing the Fed for planning three rate hikes in 2019 just about 100 days ago. Since then, the Fed changed their projected increases from 3 down to 0, which took away credibility from the Fed and showed that Trump is more aware of the risks than the Fed was. If the Fed now brings up the option of lowering rates, that could help improve mortgage interest rates. So, stay tuned.


Given the stagnant state of mortgage bonds, we are going to switch to a locking bias.

Although the Bureau of Labor Statistics (BLS) report showed that job gains in the month of March were a strong 196,000 (which was above estimates of 170,000), a deeper look into the report shows that the overall job market is weakening. In fact, much of the strength came from growth in the government sector, which is not where we want to see the growth in the labor market come from. Further, the longer-term trend of job growth is certainly trending lower. I anticipate that we will continue to see strong reports in the form of low weekly Unemployment Claims, but that monthly growth in the labor force will tame as we roll into 2020.


The report also contains other key components that help gauge the strength of the labor market. One that is closely watched by bond investors is the Average Hourly Earnings report. Unfortunately, this rate fell from an annual growth rate of 3.4% down to 3.2%. This is good news for mortgage interest rates, as it shows that wage-based inflation isn’t much of a concern right now. If we continue to see this number low, we will likely see overall inflation levels remain low. Since inflation is the arch enemy of the interest rates, low inflation equals low mortgage interest rates.


With this report now behind us, we are going to switch to a carefully floating bias.

Mortgage interest rates have been slowly ticking higher as the stock market rally continues to be a strong headwind against the bond market. When you consider that stock prices have climbed from being at two-year lows in January to once again looking to challenge new all-time high levels just three months later, this puts the strength of the stock market into perspective. When you add to that my belief that there is a recession just around the corner, you can see why I believe the stock market is irrationally high right now. However, history makes perfect sense of this phenomenon. Look back on what happened in 2006. Both the housing and stock markets where on a tear higher. If only people could have seen what was around the corner, many would have made different decisions.


Tomorrow is a big day for the stock and bond markets, with the Bureau of Labor Statistics set to announce their estimate of new job creations in the month of March. If today’s weekly Unemployment Claims number is truly reflective of the current state of the labor market, we can expect to see a very strong number in tomorrow’s report. The weekly total of Claims last week was 202,000, which is the lowest weekly number we have seen since 1969! Clearly, the labor market remains strong. However, the strength of the labor market is one of my greatest reasons to support a pending recession. In every economic cycle, once the labor market hit its strongest point, it was immediately followed by a strong jump higher in the Unemployment Rate. With the employment market as strong as it is now, we would be foolish to assume this will last. It never has. History repeats itself over and over. This will be no different.


With tomorrow’s report expected to be strong, there is great risk in floating. We will maintain a locking bias.

Stock prices climbed above the strong ceiling of resistance yesterday, taking another step towards setting new all-time high records. It’s too early to say for sure if stocks will be able to hold on to their gains or if they will be pushed back below before the old ceiling becomes a strong floor. With this week being “jobs week,” much of the outcome could be decided by the number of new hires in the month of March. Given that last month was a dismal 20,000, this could be a “catch-up” month where we see a very strong number. That would likely trigger a rally in the stock market that would create an additional headwind for mortgage interest rates.


CoreLogic reported another strong month of home price gain, with February’s numbers coming in at a 0.7% gain. Although this sounds incredible, the year-over-year gain was only 4%, which is well below the trend of recent years. Don’t get me wrong, a 4% gain is still amazing. It does show, however, that the market is slowing. With the spring and summer buying season just around the corner, I expect that we will see a hot housing market, at least for the near term. As we approach 2020, we will likely face additional recession headwinds.


With stocks still posing a threat to the bond market, we will maintain a locking bias.

Mortgage bonds continue to slowly lose value, as the short-term minor correction pressures mortgage interest rate pricing higher.


News of the morning included the Fed’s favorite gauge of inflation, the Personal Consumption Expenditures (PCE) report, which showed that inflation cooled once again in the month of February. The all-in inflation headline number fell from 1.8% down to 1.4%. The Core Rate, which strips out food and energy prices also fell, going from 2.0% down to 1.8%. This is clearly good news for mortgage interest rates, and a key indicator that the Fed has grossly underestimated the overall strength of the US economy and the anticipated rate of inflation. This has been a strong driver of the Fed backing off the three anticipated rate hikes in 2019.


The 10-Year Treasury Note yield has broken above the critical level at 2.41%, and now technically has a clear run higher up to 2.57%. It’s far too early to predict this will happen. However, it is a risk and something we need to closely monitor. With the tame inflation report, we would have expected to see yields falling. But since that isn’t happening so far, now is the time to be cautious.


Given the downward pressure on bond prices, we will maintain a locking bias.

Mortgage bonds are lower this morning, backing off the highs reached yesterday. After a 130-basis point gain without a correction, it would be a healthy move for bonds to take a breather before resuming their climb higher.


Today’s news has been mostly bond friendly, with Pending Home Sales falling 1% lower in February, which is well off the 0.7% gain the market anticipated. In addition, the final 4th quarter 2018 GDP report showed a growth rate of 2.2%. Although this modest gain isn’t terrible, it is a sharp drop from the 2.6% rate previously reported.


The 10-Year Treasury Note yield is holding at 2.377%, which is still beneath the support at 2.41%. If yields don’t tick above the ceiling, there is still plenty of room for yields to drop even further.


With bonds showing signs of a pullback, it will be a good time to lock for those needing to close soon.

Shockingly, mortgage bonds are improving in early market trading this morning. The longevity of this rally makes me nervous as we would typically see a short-term correction in this long of a rally. Since mortgage interest rates never move in a straight line, we expect to see more volatility than we have experienced, especially in a time when the stock market has also been moving higher. And as you can see by looking at the stock market, although the trend has been upward, it certainly hasn’t moved in a straight line. I would have expected the bond market rally to somewhat mirror or match the stock market rally.


More clear signs of a global slowdown are apparent with the 10-Year German Bund (Germany’s equivalent to the U.S. 10-Year Treasury Note) now paying a negative rate of return. In other words, an investor must PAY to invest. As ludacris as that sounds, this is like the environment we had during the Great Recession. This is clearly pushing money into the U.S. 10 Year Treasury Note. Even after the exchange rate, it is paying a greater return than a German investor would make by investing in their own government. This has driven the U.S. 10-Year Treasury Note yield down to 2.37%, which is lower than most every economist would have guessed.


If you haven’t yet locked a rate, I’m getting really nervous at current bond price levels. I feel a pullback coming soon. Float only if you are closely watching the markets.

After taking a big hit two days ago, stocks formed a reverse head and shoulders pattern right on its

25- day moving average. This is a bullish indicator that showed its strength in early trading this morning, driving stock prices significantly higher. This is creating a headwind for mortgage bonds, which generally compete for the same investment dollars. This is a technical rally that could set the stage for stock prices to challenge new all-time high levels in the days to come. The key thing to remember is that with many signs of a troubled economy ahead, the higher stock prices climb, the greater potential fall when the rally does come to an end. I believe the economic expansion we have enjoyed for nearly a decade is on its last leg. I see this as a time to proceed with caution, but not necessarily to call it quits just yet.  I’m watching this closely and will be ready to adjust when the time comes.


One of the most predictable signs of a pending recession is when the yield curves begin to invert. This means that you can achieve a higher rate of return on a shorter investment relative to a locking up your money for a longer period. At the tail end of last week, the 3-month treasury rate was paying a higher return than the 10-Year. This is a terrible sign for the longer-term economic outlook, and another clear indication of a recession around the corner.


There is much debate about the impact of the next downward move in the US economy. Since most economists predicted interest rates to continue to climb, many have lost credibility in my book, including the Federal Reserve. The signs of lower rates ahead were clear to me. However, most experts couldn’t see it. So, when the same experts say this will be nothing more than a “hiccup”, take that with a grain of salt.


With bond prices seemingly looking to soften in the near term, we will take the safe play and switch to a locking bias.

Mortgage bonds are holding their gains so far this morning, as the market waits to see if last week’s break above the strong ceiling of resistance is real. It’s too early to say if this move is sustainable or if bond prices will come crashing back down beneath the new floor. Mortgage bond prices are being supported by the 10 Year Treasury Note yield which is on the verge of breaking beneath 2.4%. This is an area that we have not witnessed in over a year. In fact, it was during the massive bond market meltdown that we last saw yields at current levels. This is providing a great opportunity for those needing to purchase or wanting to refinance.

Many have been surprised by the recent dip in mortgage interest rates. It was a very small percentage of economists who believed this would happen. For those who used the false projection of higher mortgage interest rates to spark fearful decision, there is a great lesson to be learned here. By following the masses, many consumers have paid large amounts of money to buy down an interest rate. I want to reiterate that I strongly believe people getting a mortgage should lean towards a no-cost loan. If rates happen to continue to fall, a no cost refinance can be done six months later. This is a no-brainer. If you’d like to review the overall savings, please reach out and have one of my team members help.


Although there is no need to immediately rush to lock, I’m worried that we could see a pull-back happen. So, if you choose to float, do so only if you are able to closely watch the markets.