Mortgage Mike’s Daily Rate Commentary

Markets experienced their first yield curve inversion in over a decade today, with the spread between the 3 and 5 year notes falling negative.  Although the more closely watched spread between the 2 and 10 year yields are still about 20 basis points away. This move is the first sign of what I believe will be an overall yield curve inversion. Historically, an invested yield curve is one of the most accurate precursors to a recession. This will likely cause the Fed to reconsider their intent of continuing to hike short term interest rates, as Fed President Jerome Powell mentioned last week. This is a sharp turn from his statements made just a few short weeks ago where he indicated that continued rate hikes are justified. This falls in line with my longer term prediction that mortgage interest rates will fall in the months to come. Given that few economists currently are aligned with this belief, this statement should be taken with a grain of salt. While most believe that both mortgage interest rates and home values will continue to climb higher, I strongly believe that one or both will soften.


A cease fire was announced in the trade war between the U.S. and China, which has fueled stock prices higher. This has also fueled hope for a year-end stock rally that could put stocks back on a path of earning a reasonable return for the year. However, a look at the charts will show that the recovery is now near a 50% correction of losses, which is typical in most any significant period of loss. Meaning that unless stocks are able to make a decisive break above current levels, this could be a short term recovery as stock prices make their way down the charts. The next few days will be extremely important for stock investors. If prices do break higher, they would have an easy path to reach new all-time highs  Regardless, the volatility is not a good sign for stock investors. Personally, I’m skeptical of this move higher and see the volatility as a sign of nearing a bear market.


With bond prices moving higher, there is no need to immediately rush to lock. However, be careful of the 100 day moving average. This could prove to be a strong ceiling of resistance that could cause bond prices to fall.

Mortgage bonds failed to advance yesterday, as bond prices softened. Fortunately, prices remain in an upward trading channel, at least for now. However, they are currently at the bottom of this channel, so we could see this change. With a strong ceiling of resistance not too far above current levels, we will soon learn if we will see rates improve or move a bit higher in the near term. This will heavily be influenced by the 10 Year Treasury Note yield, which has fallen to its 100-day moving average. If we see a break beneath this critical level, we will likely see mortgage interest rates also improve. But because this is a strong floor of support, we shouldn’t plan on this happening.


Next Friday we will receive a report on the job market from the Bureau of Labor Statistics (BLS). Given that we have seen an uptick in Unemployment Claims in recent weeks, it will be interesting to see if the labor force is weakening. The current Unemployment Rate sits near a 50-year low, at 3.7%. Will we finally see this important indicator move higher; I’m not sure. But I do know that history shows that after hitting a low point of a cycle, this rate is almost certain to take a steep jump higher. That would indicate the beginning stages of a recession. I don’t believe we are there quite yet. However, I do believe that time is not too far into the future.


Given the resistance levels the bond markets are facing, we will maintain a locking bias.

Yesterday, Fed Chairman Jerome Powell finally gave the markets what I hoped he would offer for a long time. He stated that the current path of Fed rate hikes may not be the best strategy for 2019. He finally realized that driving short term interest rates higher will speed up the process of the US economy entering a recession. By holding interest rates at or near current levels, they may be able to delay the recession that will eventually hit regardless of what the Fed does. The Fed has a history of not knowing when to stop tightening their policies, and there is no reason to believe this time will be any different.


Since economic expansions all come to an end, we are closely monitoring the signs that indicate at what point this will happen. There is a lag between the point at which the turn happens vs when people realize it is underway. I strongly believe that the process is already underway and wonder why most economists don’t see what I see. Both the housing markets and mortgage interest rates are expected to continue to climb higher. I don’t see this happening. I believe one or both must fall.


With corporate debt now at its highest level in history, continued increases in interest rates will force many companies to struggle as the payments become unmanageable. Further, with both housing prices and interest rates moving higher, according to FHA statistics, debt to income ratios of new homeowners has also reached the highest level in history. Once again, this is not sustainable. Either interest rates and/or home prices must soften.


Mortgage bonds were able to break above their 50-day moving average, which is a great sign. Although I believe interest rates have room to fall, we could see upward pressure in the near term. If you don’t wish to take the risk, rates are in a great position to lock.

Stocks recovered in late day trading yesterday and are following through and advancing once again this morning. Yesterday’s advancement was enough for stocks to break out of the downward trading channel that took a painful toll on the market. With the 200-day moving average not too far above current levels, we could see stocks challenge that critical ceiling at some point before the end of this week. The near-term direction of the markets could be influenced based on statements Fed Chairman Jerome Powell will be making a bit later today. Markets will be looking for any sign of how the Fed will react to recent stock market drops, a slowing housing market and overall lower pace of growth in the US economy. Based on the last Fed statement, the path of gradual rate hikes is anticipated to continue. I believe future rate hikes will be harmful to the economy and should be re-considered. However, the Fed seems determined to continue its path.


The Median Home Price was reported to be $309,700, which is down 3.1% on a year over year basis. Further, inventory levels grew to a 7.4-month supply, which is adding to the downward pressure on home values. The Commerce Department report showed New Home Sales dropped 8.9%, which represents a decrease of 12% over past year. With 336,000 unsold homes on the market right now, inventories are at the highest levels since January 2009. New home sales have decreased four of the past five months, which shows the trending path isn’t supportive of continued rapid appreciation gains. I continue to believe that we will see lower home prices and / or lower interest rates in the future. The current path of increasing rates and home values isn’t sustainable. Especially in the recessionary period we are on the verge of entering.


Mortgage bonds are currently battling their 50-day moving average. If they can break above this level, we could see a nice rally. For those who can closely monitor the markets, I suggest a floating bias to wait and see what happens.

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.