Mortgage Mike’s Daily Rate Commentary

Inflation remained in check with Core PCE for December coming in right at estimates of 1.9, and the ISM Manufacturing PMI reported at 49.4, which missed estimates of 51.5 and dropped below the previous months 49.6 figure. Consumer Sentiment for February was also lower than expected. While all these reports are considered bond friendly and would push rates lower, the bond market reaction has lacked enthusiasm. In fact, bonds are in danger of falling out of their trading channel that has formed for the past month, and the 10-year Treasury has pushed higher out of its respective channel. This will result in interest rates moving a notch higher.


Next week is a big week for economic reports, and it could be critical for stocks as they continue to look for a reason to break the ceiling of resistance since last October. However, the reports could disappoint and be the catalyst that send stocks falling again. Until we see that happen, we will maintain a locking bias.

2018’s 4th quarter GDP revision came in at 2.6% versus the 2.3% estimate, and the Chicago PMI beat estimates as well at 64.7 versus 57.0 estimate. Investors also have their eye on President Trumps attempt to strike a deal with North Korea, but that does not appear to be happening at this time.


Tomorrow’s PCE could be a catalyst to move the markets if a rise in inflation were to surprise us by increasing, and next week brings employment numbers.  Stocks have stayed relatively flat, but mortgage bonds are being pressured to move to the low side of their channel. The last 2 days have been in the red for mortgage bonds, so we will maintain our locking bias.

Today’s economic reports included weekly mortgage applications rising again, and a welcome surprise in pending home sales for January. The NAR (National Association of Realtors) report jumped up 4.6% from December, with Lawrence Yun, NAR’s chief economist attributing “A change in Federal Reserve policy and the reopening of the government as very beneficial to the market”. He added that higher rates had discouraged many buyers in 2018 and they are now returning to the market, which also has a boost in inventory to choose from. Expectations for 2019 existing home sales are estimated at 5.28 million, which is down 1.1% from 2018. Fed Chairman Powell is also giving congressional testimony, and markets are watching closely for any additional insights.


Currently stocks and bonds remain in their respective ranges, with both markets slightly in the red for now. Since bonds are still range bound, we will maintain our locking bias.

There were many reports on the strength of the U.S. Housing Market this morning, with the consensus showing growth, but just not at the same pace as we have grown accustomed to the past several years. The reports are also covering winter months, including December, which are always on the low side. Even if we are heading into a slower market and recession, I believe the housing market will remain somewhat strong up until the point that it isn’t. If you look back on 2006, the makings of a recession were well in play, with many indicators pointing towards a slowdown coming. That didn’t stop eager homebuyers from buying up houses at inflated prices. Since most people make decisions based upon how they feel and the economy is performing currently, they ignore signs of a pending slowdown. Also, since no one can accurately predict at what point a recession will hit, people don’t want to miss out on what is available now. I think we will see the same thing happen the next recession go around. As a result, I anticipate a strong buying season just around the corner.


Fed Chairman Jerome Powell is speaking to the Senate today. Although the talk just started, he has already implied that he is willing to alter the plans to reduce the Fed’s balance sheet if the stock market falls. This piece of news is like providing a safety cushion to stock investors. With the implied bail out from the Fed as a backup, investors will be willing to take on additional risk. This statement from Chairman Powell came at a timely moment, as stocks have recovered about 75% of their losses from late 2018. This extra boost could propel stocks towards all-time high levels in the weeks to come. However, keep in mind that the higher stock prices go, the more they will fall when stocks eventually tumble. It’s a risky market and is overdue for a meaningful longer-term decline.


Unless bonds have the strength to break above the ceiling of resistance, we will maintain a locking bias.

Stocks are climbing higher once again this morning, following news that President Trump is giving China more time to finalize a trade agreement before slapping the planned round of tariffs against products imported from China into the United States. Stock investors clearly see this as a step in the right direction, so investors are pouring money into the stock market. This is pulling money out of the bond market, which is adding upward pressure to mortgage interest rates. However, since bond prices remain trading within the same sideways channel that has held rates stable, there is no reason to panic at the moment. If prices don’t break beneath the floor of support, rates should maintain within a tight range.


Today is a quiet one for scheduled economic reports. However, the news wires heat up as the week progresses. The week’s news will be highlighted by Inflation, GDP, Housing and Fed President Jerome Powell’s Speeches to the House and Senate. If inflation numbers continue to show falling numbers, and GDP shows a shrinking economy, we could see rates improve. However, we have equal risk on the opposite side as well. We will keep you posted and let you know how the week turns out.


Given the lackluster market, we will maintain a locking bias.

In perfect technical fashion, and exactly as planned, mortgage bonds bounced higher after dropping to the bottom of its trading channel. This is a show of strength for mortgage bonds and gives hope that when bonds do break out of this trading challenge it will be to the benefit of mortgage interest rates.

This is a slow week for scheduled economic reports, so markets will trade heavily based on the technical outlook. Given that the trading range for the bond market is as tight as it is, there isn’t a lot of room for mortgage interest rate pricing to improve. Therefore, unless something happens to drive bond prices higher, pricing will remain relatively stable.


One key unknown will be the market’s reaction when Robert Mueller releases his findings surrounding the Trump campaign and Russia. If there is strong proof that ties President Trump to crimes, we can expect democrats to move towards impeachment. That would not be good for the stock market and would likely benefit mortgage bonds. However, if there is no “smoking gun” to tie President Trump to crimes, then stocks could continue to gain steam. One key thing to consider is that stocks are due for a drop. Could this all come together at the same time? We’ll see. In the meantime, I maintain my belief that bonds will climb higher in the long term, which is good news for those who hold mortgage loans at higher rates.


I will maintain a locking bias.

The Federal Reserve gave the mortgage bond market exactly what we hoped for yesterday, with the Meeting Minutes showing the Fed is likely at the end of the rate hike cycle and will soon announce a plan to once again start reinvesting the money that comes from their investment holdings back into mortgage bonds and treasuries. To better understand this, let’s take a step back into history.


Shortly after the Great Recession, the Federal Reserve started a program they called, Quantitative Easing, where they drove interest rates lower by investing into mortgage backed securities and U.S. Treasuries. Throughout the QE process, the Fed invested approximately $4.5 trillion, which caused interest rates to fall to record lows. As the U.S. economy reached a point where it no longer needed additional investments, the Fed stopped investing new monies but continued to reinvest money that would have fallen off their books due to the mortgages they owned being refinanced or sold. Eventually, they slowed the pace of reinvestment, until last October where they stopped reinvesting any of the monies and allowed their balance sheet to drop by about $50 billion per month.


With the Fed once again likely to become a purchaser in the mortgage bond market towards the end of 2019 or early 2020, this will align with my belief that rates will be lower in the longer term. Because of this, I would strongly consider using a no cost mortgage when locking in a rate. Take advantage of what we have now and set yourself up for another no cost loan if rates drop in the future.


After hitting the top of the trading channel, mortgage bonds made a technical move to the bottom. I expect this support level will hold. However, since the potential improvement to interest rate pricing is minimal, locking still makes sense.

Both stocks and bonds started the day relatively flat, as markets await the release of the Federal Reserve Meeting Minutes from their January meeting. Historically, the bond market hasn’t performed well following prior releases. However, now that there are clear changes in the longer-term outlook for the U.S. economy, we could see bonds improve upon the release. If Fed members have a softer tone to their statements, that would be good news for the longer-term outlook of mortgage interest rates. When you consider that very few predicted mortgage rates being as low as they are now, this is truly a gift for those considering purchasing a home, as well as to those who closed a mortgage in recent months when interest rates were higher. The key lesson is to always consider paying zero to very little in closing costs when getting a mortgage. I suggest a no cost loan in most cases. Historically, that has proven to be the best strategy.


One of the key points of interest in today’s Fed Meeting Minute release is the planned reduction in the Fed’s balance sheet. In what could be the biggest policy reversal in many years, the Fed could announce a slowdown in the pace of reducing its holdings of mortgage backed securities and U.S. Treasuries. So rather than let bonds roll off their balance sheet, they could choose to reinvest assets that are matured or paid off back into new purchases. It was Quantitative Easing that helped drive mortgage interest rates lower for the past number of years. This would be a smaller scale version of QE and could once again cause rates to fall. In the long term, this would be helpful for the real estate and stock markets.


There is limited room for mortgage interest rates to improve before hitting resistance. We will suggest floating into the Fed Meeting Minute announcement. However, if the market has an adverse reaction to the report, we will quickly switch back to a locking bias.

Mortgage bonds are advancing in early morning trading after a nice technical bounce off the floor of support helped push bond prices higher. This move is happening despite stocks maintaining their position above the 200-day moving average; which shows the resilience the bond market currently has.


Between the stock and bond markets, stock investors are generally more optimistic than they should be, while bond investors are generally more accurate in predicting economic change. It seems that stock investors continue to show optimism, as is clearly evidenced by a greater than 8% return in the first six weeks of 2019. In the meantime, bond prices have shown stability, with interest rates dropping to levels very few economists believed they would. I continue to maintain my belief that rates will be even lower than they are now in the future. This doesn’t mean I don’t believe people should refinance now if there is a savings. However, I only suggest a no cost refinance so that homeowners can take advantage of future rate drops if or when they occur.


Today is a big day for the trade war, with talks scheduled to take place today between the U.S. and China to make steps toward coming to an agreement. As news of the talks are released today, we could see volatility increase in the bond market. Generally, this is good news for stocks and not good news for mortgage bonds, so keep that in mind if you are currently floating an interest rate.


There is a little room for mortgage rate pricing to improve. If you choose to lock, do so only if you are able to maintain a close eye on the market.

Markets opened to news that shows the true reality of the U.S. economy, with Retail Sales slumping 1.4% in the month of December. Now to put this in perspective, this was the one month of the year where many people make large purchases. Secondly, the market was expecting a 0.4% gain! For there to be a shortage of 1.8% in one single month alone is a real sign of what many economists have been blind to. To make matters worse, it was recently released that auto loan defaults have hit the highest levels in U.S. history. Think about that. Being without a car is almost as bad as being without a cell phone. If more U.S. consumers are in default on their car loans than ever before, how are they doing with their credit cards and student loans? I’ll tell you; not good. This is a precursor of troubled waters ahead.


This morning’s news of Retail Sales showing the worst report since the great recession caused the stock market to stumble. Stocks are now vacuolating above and beneath their 200-day moving average. It’s too early to make a call as to whether the bulls or the bears will win this battle. The one thing I know, investors have a short-term memory. Once news is released that points to a shining spot in the economy, we could see stocks quickly forget the Retail Sales report. Therefore, the current improvement in mortgage interest rate pricing could be short lived.


The risk of floating remains high. We will maintain a locking bias.