Mortgage Mike’s Daily Rate Commentary

Mortgage bonds got a nice bounce this morning, which was welcomed news following a significant drop in the price of mortgage bonds last week. This slight improvement seems to be more technical in nature rather than a sign of better days to come. When bond prices are in a strong downward trading channel, there will be points in time where we see retracements back that recover a portion of the losses before making another run lower. This feels to me to be a temporary retracement that we can only expect to see last until bond prices hit the top of the trading range. Now if they can make a break above the ceiling, it will be a different story. However, I wouldn’t count on that happening.

 

The recent move higher in mortgage interest rates and the 10-Year Treasury Note yield has led to the greatest losses in the bond market since the market experienced significant losses in 1976. Money managers are continuing to flee the longer-term fixed income market, which combined with the Fed slowing their purchases, has left the market forced to offer higher interest rates to attract investors. It’s hard to say at this point when an equilibrium will be reached where bond investors feel comfortable stepping back in. Until that happens, we can expect to see mortgage interest rates continue to climb higher.

 

We will continue to maintain a locking bias.

Mortgage bonds continue to get hammered, as mortgage interest rates take another step higher. The brutal path of the past few days has taken its toll on the mortgage market just at a point when the market is already slowing due to seasonal home buying coming to an end. At this point, it’s too early to say at what point mortgage interest rates will stabilize. Since bonds are in a territory that they have not been in for seven years, it remains difficult to predict what support levels could possibly slow this path. I’d count on things getting worse before things get better.

 

The Bureau of Labor Statistics (BLS) released their estimate of new job creations for the month of September, and surprisingly, it was a slower month than most economists predicted. With expectations set at 180,000, the report showed only 130,000 new hires. However, wage growth rose last month by 0.3%, and the labor force increased by .1%.

 

One shock to the BLS report was the Unemployment Rate, which ticked lower from 3.9% down to 3.7%. This is the lowest rate since 1969. Although this is a strong economic indicator of an expanding economy, we need to keep in mind that in 100% of the past times the Unemployment Rate hit its low point of a cycle, it was followed by a spike higher and a recession. Is 3.7 % the lowest we can expect to see?  That’s hard to say. However, when it does hit its low point, we can anticipate a spike and recession to follow.

 

We will maintain our locking bias.

We saw the largest one day move that the bond market has made in over a year yesterday. That resulted in a convincing break out of the range that mortgage rates had been in nearly all year as bonds fell hard and interest rates notched up over their 7-year highs. While it’s not unusual to see at least a bounce in the opposite direction on the following day, bonds are adding insult to injury as they look to close in the red yet again. This is likely the market positioning themselves for tomorrows always important Non-farm payroll jobs report. This is usually the single biggest market moving report of the month, and bonds look like a stumbling boxer with the bell ringing all too soon.

 

With all the recent Fed comments and their continual declining intervention, markets really have no choice but to look at the data for what it is. The ADP Employment report from Wednesday blew way past expectations, and that sets the stage that tomorrows jobs report likely doing the same. Given the overwhelming trend that interest rates are moving higher, we will maintain our locking bias.

Yesterday’s market update was on point, with the prediction that bond prices would fall happening today. Mortgage interest rates are setting new seven-year highs, surpassing the highs achieved a couple weeks ago. Since we are in waters that the bond market has not chartered for seven years, it becomes more difficult to say where pricing will find a bottom and rates will stabilize. The yield on the 10-Year Treasury Note is now at 3.16%, which is also in waters not chartered for seven years. This climb higher is helpful for the Fed, as it will widen the gap in the yield curve and give the Fed room to continue to hike short term rates.

 

ADP released their estimate of new job creations in the month of September, and it was much stronger than the market anticipated. The report showed 230,000 new jobs in September, which far surpassed estimates of 1749,000, and is the highest monthly figure reported in seven months. In addition, the prior month was revised higher by 5,000. This now sets the odds of a stronger than expected Bureau of Labor Statistics (BLS) report when it is announced this Friday.

 

Expect volatility to continue. We remain in a locking stance.

Mortgage bonds are holding their ground today, which is great news for mortgage interest rates. After hitting 7-year highs last week, rates have improved slightly. This is likely a retracement Improvement before mortgage interest rates take another step higher. This will be heavily influenced by Friday’s Bureau of Labor Statistics (BLS) report. If it shows that job growth in the month of September was stronger than expected, we can expect rates to climb immediately following the report.

 

Fed President Jerome Powell spoke today, saying that he anticipates the path of gradual rate hikes to continue. It seems clear that the Fed is committed to maintaining a reasonable level of inflation without allowing the economy to get to heated. Although the Fed has already met their 2018 goal of 3 rate hikes, the odds of one more rate hike in the month of December are relatively high. Combined with the continued reduction of the amount of bond purchases, the tightening mode is in full swing. Eventually, this will catch up to the stock market and create a headwind that will force stocks lower.

 

Although bond prices are holding, odds of significant improvement are minimal. Therefore, we will maintain a locking bias.

Stocks are climbing higher this morning, following the announcement that the United States has formalized a trade agreement with Canada and Mexico. The new agreement will replace NAFTA, and will be called, “The United States- Mexico- Canada Agreement (USMCA). Now that this agreement is formally in place, this will end the concerns over future tariffs being levied against either Mexico or Canada.

 

The stock market was set for a higher run following stock prices hitting the bottom of a very strong trading channel. The long-term momentum in the stock market is very strong, with the trading channel holding firmly in place. We can now expect stocks to hit the top of the trading channel before settling back down.

 

Today is a quiet news day, so markets will trade heavily based on the technical picture. This is not good news for mortgage bonds, as we have a head and shoulders pattern forming that could spell trouble ahead. With this being “Jobs Week,” market volatility will likely increase. The important news will come on Friday, when the Bureau of Labor Statistics (BLS) announces their estimate of new hires in the month of September. The market is currently expecting to see about 180,000 new jobs. A stronger than anticipated figure could cause rates to move higher, so we need to be careful going into this report.

 

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

Mortgage bonds are trading near unchanged levels this morning, which is a bit of a surprise considering news of continued tame inflation.  According to the Personal Consumption Expenditures (PCE) report, year-over-year Headline inflation fell from 2.3% down to 2.2%.  With this being the Federal Reserve’s favorite gauge of consumer inflation, this is good news to the mortgage bond market.  However, mortgage interest rate pricing is showing very little improvement, which could be a sign that bond prices have hit a ceiling.  It may take a few days to see what trend we will see in the weeks to come.

 

Next week is an important week for mortgage interest rates, with the Bureau of Labor Statistics (BLS) set to announce their estimate of new job creations in the month of September next Friday.  This highly influential report could set the direction of mortgage interest rates for the weeks to come. Assuming the trend of a strong labor market continues, we can expect to see rates move higher.

 

Given the bond markets’ inability to improve following the low PCE report, we will switch to a locking bias.

The day after the big Fed rate announcement has been relatively uneventful in the markets, despite quite a few economic reports released today.  GDP final revision for Q2 at 4.2%, durable goods well above expectations, and jobless claims  very close to expectations.  The bond market will happily accept uneventful, especially due to the fact that Fed chairman Powells comments have been digested overnight and they are not selling off and pushing mortgage rates higher. His “no surprises in inflation” comments couldn’t have come at a better time, and just might help turn bonds around from the relatively steep and definitive fall which caused the climb in rates over the last 30 days.

While a few days dos not constitute a new trend, every day this level holds makes for a higher probability of change. We will maintain a cautious floating bias.

To no one’s surprise, the Federal Reserve raised short term rates for the third time this year.  In summary, Fed Chairman Powell stated that inflation was in line with expectations, with no “unpleasant” surprises.  Markets responded with stocks selling off a bit and the bond market moving to the green.  That’s a welcome relief for mortgage interest rates , which were sitting at their high’s of the last 7 years. In housing news, year over year home price appreciation “decelerated” for the 4th month in a row, meaning the rate of increase was positive, but at a slightly lesser percentage than the previous pace.  While the rate hike news is perceived as the main event, the after event Q & A with chairman Powell will be picked apart looking for insight about future monetary policy.

Mortgage bonds have been hovering at a pivotal point for the last 5 trading days.  They were at this point most recently just 4 months ago in May, but quickly reversed direction and interest rates moved off of the highs of the year.  While today is a positive sign given the fact that mortgage rates did not push to a new high, they are far from changing direction.  The only confirmation will be how the markets digest the details of Chairman Powells comments, and bonds don’t fall back in the rut that pushed rates up.  We will very cautiously move to a floating bias, but stand ready to change back to a locking stance if bonds show any sign of continuing the tumble downward.

Consumer Confidence posted close to an 18-year high and housing prices increased again, though not as much as forecasted. Markets are continuing their passive attitude today with stocks hovering ever so slightly in the green and mortgage bonds slightly in the red, yet again.

 

It’s the day before the Fed meeting, and markets appear to be positioning themselves to make their move in response to the comments, or more so their interpretation of the comments made tomorrow. It’s always a wild ride to watch the markets often violent reaction to an event as traders attempt to read between the lines and take such opposing positions with billions of dollars at stake. But only after it settles down and the prevailing move shows itself will we know the final answer. Are mortgage rates going higher or is there finally some relief?  It’s a big risk / reward environment, so will maintain our locking bias.