Mortgage Mike’s Daily Rate Commentary

In another perfect technical example, stocks hit the floor of support in late day trading yesterday and bounced significantly higher in early morning trading today. However, as we have seen a few times in recent weeks, this rally could be short lived. The key to notice is that each time this happens, the highs become lower and the lows also become lower. This is a clear sign of trouble for the stock market, which is truly long overdue for a significant correction. My guess is that we will see this rally stall quickly and then see stocks test the floor once more. However, this time, I feel we could see a break through happen. That could align with the timing of tomorrow’s Fed announcement on interest rates and the overall state of the US economy. A bearish tone could cause investors to panic, as they should.

 

With more than 72% of Trump supporters polled saying that they believe President Trump has not been truthful about Robert Mueller’s investigation into Russian interference in the 2016 election, it seems likely that some investors will lose faith in the President’s ability to positively impact the markets going forward. When you consider that just 12 short months ago, the markets were cheering the tax reform bill and continuing to see glory days in the stock market well into 2020. As we round the corner and end 2018, it is truly shocking to know that the stock market is negative for the year. Very few economists would have seen that coming.  As we head into 2019, we should take a lesson from ex-Fed Chairman Alan Greenspan, who recently said that he believes the market cycle has peaked. Now is a time to be cautious.

 

Mortgage bonds hit up against their 200-day moving average and have since backed down. If bonds can break above this critical level, we could see a nice improvement to mortgage interest rates. Since breakthroughs are the exception and not the rule, the safe play remains to lock. If you’d like to take a bit of a chance and wait and see, do so only if you are able to closely monitor the markets. Be prepared to lock.

Stocks are at it again; this time falling beneath the low levels they experienced last week. The saving grace could be that they are likely to bounce off the floor of support that is just beneath current levels. In fact, we could see stocks make a nice run higher as the trading day wears on. The general rule is that once the bottom of a trading channel is hit, the next move is more than likely to bounce higher. Although it is certainly possible that stocks could continue to fall, I’d be placing buy orders right now. Keep in mind that if stocks do break beneath this floor, they could have a long way to fall. That would provide a nice tail wind for mortgage bonds and could help drive interest rates lower.

 

Tomorrow is the first day of the Federal Reserve’s two-day Federal Open Market Committee Meeting (FOMC), with the decision on interest rates and monetary policy to be announced on Wednesday. Although we anticipate the Fed to raise rates, we feel they will have a more non-committal tone regarding future rate hikes. This move could help further tighten the spread between the two and ten year note yields. As the two come closer, the odds of a recession intensify.

 

Given that mortgage bonds remain beneath their 200-day moving average, and that we anticipate stocks to bounce higher, we will maintain our locking bias.

After another failed attempt to break above its 25-day moving average, the US stock market is getting hammered once again in early market trading. This is not a good sign for those hoping for an end of year recovery in the market. If stocks once again test the floor of support, the floor will continue to weaken until it finally breaks through. Think of this as a hammer hitting a window. Although it may bounce off the glass the first several times it makes contact, with each hit the glass is weakening. Eventually it is going to break. When the floor that has held stocks up finally gives, we will see a more dramatic move to the downside, which will help add a nice tail wind to drive mortgage interest rates lower. It may not happen soon, but I believe it will eventually happen.

 

Weak economic reports out of both China and Europe have the US markets nervous of a global slowdown this morning. China’s industrial output and retail sales were the lowest they have been since 2003. When you consider that is even lower than what was reported during the great recession of 2008, that sheds light to the severity of the current headwinds facing the Chinese economy. Clearly, the trade war between US and China is taking its toll. If this isn’t resolved quickly, the overall global economy will suffer.

 

Mortgage bonds remain trapped between their 200- and 100-day moving averages. If they remain above their 100, there is no need to immediately rush to lock. However, the potential improvements are minimal. Given the risk/reward tradeoff, we will maintain a locking bias.

Both stocks and mortgage bond prices are relatively flat so far today, as both markets sit in the middle of wide trading ranges. The challenges with being in the middle are that volatility can be exacerbated, causing wide swings in one direction or the other. It seems that with little news driving the markets, they are watching each other closely to help decide which direction to take. Given that the technical picture for mortgage bonds is not favorable now, the next major move could be an unfavorable one. However, if the 100-day moving average holds, mortgage interest rates should be somewhat stable. If this level does fail, rates will most certainly take a step higher.

 

This morning’s Initial Unemployment Claims number came in well below what the market anticipated. However, economists clearly weren’t considering the impact to a company for making layoffs just before Christmas when they came up with their estimates. There is a stigma around businesses that fire people just before Christmas, which keeps many people who should be fired still employed until after the New Year. So realistically, the number of new Unemployment Claims will be lower throughout the end of December. Once we get into mid-January, watch out. We could see a pent-up demand of layoffs hit the market at once, which will contribute to the first quarter of 2019 starting out on shaky ground.

 

Once again, we will maintain our locking bias.

Mortgage bonds have taken a turn for the worse, with the charts pointing towards upward pressure on mortgage interest rates in the short term. This purely technical outlook does not have a lot of reason behind the prediction, other than the technical outlook shows that bond prices have reached a ceiling of resistance that bond prices are unlikely to surpass. Based on the news, we received the Consumer Price Index (CPI) report this morning that shows that inflation remains tame. This could help reduce the likelihood of the Fed continuing to hike short term rates. Although many experts, such as Merri Lynch, predict three rate hikes in 2019, I see either zero or possibly one. In fact, I think the Fed will need to reduce rates as we head into 2020.

 

The stock market continues to bounce wildly from up to down. After a strong opening yesterday, stocks lost all their gains and closed lower for the day. This morning, so far, they are up strongly. I don’t see a reason for stocks to climb much higher in the short term, especially with continued political pressure against President Trump continuing to build. As the White House prepares for an impeachment battle as the Democrats take the majority in the Senate, this could hinder the momentum the Trump administration has had towards investor friendly policies. That will hurt the stock market and likely help improve mortgage interest rates. Combined with a pending recession and a slowing housing market, 2019 could be an interesting year.

 

We will maintain a locking bias.

In perfect textbook fashion, stocks took a strong bounce higher yesterday after hitting the significant floor of support we have talked about in recent market updates. The bounce was strong enough to erase a nearly 500-point drop in the DOW. The upward momentum is still strong this morning, as markets continue to climb higher once again today. Although this is purely a technical move higher, investors are crediting improved relations between the US and China. However, the stock market would have bounced off this floor regardless. It will likely take something very negative in the economy or in the on-going saga regarding President Trump to push stocks below this level.

 

The upward momentum in the US stock market is in no way a sign that stocks are out of the woods. Even in a falling trend, markets will pause and regain some of their losses before making another run lower. Increased volatility is often associated with markets entering a bear market. Clearly, we have recently experienced an uptick in volatility. Although most economists don’t yet see a recession as imminent, I strongly believe that we are now in the early stages of a downturn. Even looking back on history, the bond markets inverted in 2005. For many, that is a definite indicator if a recession to come. Most didn’t see the extent of what was coming until it was well underway, with much of the impact still unknown until 2008.

 

We will maintain our locking bias.

Stocks had another terrible day on Friday, with prices falling to the floor of support we have identified in recent market updates. Unfortunately for mortgage interest rates, this floor has once again proven its strength. Although I believe a drop beneath this critical level is imminent, the timing of this occurring is unknown. It will likely take a negative event to provide stock investors with the deep dose of reality that I believe they should have caught on to long before now. I realize that my opinion may not be in line with what most economists believe. However, more and more are moving over to my point of view each day.

 

A look back on the history of mortgage interest rates, there are clear situations that led to most major interest rate declines. One of the greatest influences has been events overseas. Consider the impact Brexit had on mortgage rates, or the debt crisis in Greece. These events were responsible for driving U.S. interest rates down into record low territories.

 

I believe that we are once again on the verge of facing more crisis in Europe. First, Brexit is currently scheduled to begin on March 29th. This major event could throw the U.K. into a deep recession as it learns how to function apart from the European Union. In addition, there is a major crisis brewing in Italy that would have a severe impact on the global economy. I believe that as a result we will see global yields fall, which will help support lower mortgage interest rates.

 

Unless mortgage bond prices can break above their 200-day moving average, we will maintain our locking bias.

U.S. stock markets are once again getting slaughtered, losing the significant gains they made in late day trading yesterday. Clearly, there is a lack of trust in the strength of the U.S. economy or geo political concerns that are causing angst within the mindset of investors. This is a huge adjustment from where things were just 12 short months ago when the markets were celebrating the tax credits and ongoing deregulation in the financial markets. From that to now fearing a recession is a significant adjustment. Many who once believed the good times would be around for many years are now second guessing themselves.

 

This morning’s Bureau of Labor Statistics (BLS) report showed that there were fewer new jobs created than the market anticipated. This unanticipated slowdown is adding fear to the markets, which could also partially explain the large drop in stock prices today. The Unemployment Rate remained steady at 3.7%, which many are celebrating. To me, this is a terrible indication of where things will be heading soon. With the Unemployment Rate now near a 50-year low, there is only one way for this to head. And history shows that after this rate hits the low point of the cycle, it jumps up dramatically in the months to follow.  We can count on this happening once again in the future.

 

Mortgage bonds are right up against their 200-day moving average. Odd are that they will not make a decisive break above this critical level yet. Therefore, we will maintain our locking bias.

Financial markets were closed yesterday in observance of former President George H. Bush. However, the day prior to the market’s closing was a horrific one for the U.S. stock market.  The downward momentum is continuing so far this morning. However, there appears to be a light at the end of the tunnel. Stocks are now approaching a low that has continually held for more than one year. Further, mortgage bonds are now approaching their 200 day moving average. Since they have not breached this level in well over a year, it is unlikely they will be able to break above this critical level on the first attempt. Clearly, this means we expect to see the stock market improve in the near term and upward pressure added to mortgage interest rates. Will the improvement last?  There has been so much volatility in recent months. I see the level of volatility continuing, which will be helpful for the longer term outlook of mortgage interest rates. So while I see a breakthrough coming, don’t expect that to occur immediately. It will take time.

 

We are going to switch our stance back to a locking bias.

Both the U.S. stock and bond markets are current at critical points, with each likely closely monitoring the other for direction. Stocks are poised to open lower when the trading bell rings, while mortgage bonds are showing a slight improvement. Today is set to be an interesting one for President Trump, as Robert Mueller is scheduled to release the first of a series of disclosures surrounding the election that could be harmful to President Trump. Depending upon the extent of damage, if any, we could see the stock market react negatively to the news. This would likely benefit mortgage bonds, which have already experienced significant improvements in recent weeks.

 

With the spread between 10 year and 2-year Treasury Notes now about 10 basis points apart, it’s important to understand why I believe this is a precursor to a recession. With the spread between the two inverts, you will be able to invest money and tie it up for only two years and be paid a higher return than if the money was tied up for 10. The longer you commit to an investment, the higher the rate of return is. This is a deflationary indicator, which is a sign that the market believes that longer term rates will be lower in the future than they are today. So, although this does not help push the economy into a recession, it is a symptom of one to come.

 

If mortgage bonds can break above their 100-day moving average, we could see another step lower in rates. Watch the markets closely if you choose to float, as sentiment can reverse quickly.