Mortgage Mike’s Daily Rate Commentary

Stocks had a gap-up opening this morning and have powerfully broken through their 200-day moving average. This move is not good news for the near-term direction of mortgage interest rates, which will likely continue to trend higher under the headwind created by the stock market. This move in stocks implies that there was a built-in loss assuming that the government would shut down once again. As statements come out from Republicans aligning with President Trumps desire to declare a national emergency in order to fully fund the boarder wall, investors are assuming this means that Trump will reluctantly accept the offer that is now on the table to prevent another federal government shutdown. Although a shutdown appears likely to be averted, I anticipate the boarder wall to be an ongoing political struggle that will further divide democrats from republicans and fuel additional market volatility.

 

The Federal Reserve members are trying to show they are all on the same page, with several offering similar opinions about the strength of the U.S. economy going forward. The key concern is whether the markets should anticipate more rate hikes in the near term. The Fed went from estimating three hikes, down to two, and now the question is whether there will be any hikes at all. The Fed sees great strength in the current economy, with most only expecting a slowdown vs dramatic fall. This seems to be a risky belief; one which assumes we will escape an actual recession. I’m not sure how educated people can make this assumption. Economic cycles have been predictable for many years. My belief is that we are on the verge of another recession. But we will have to wait and see.

Republicans and democrats took a step closer in resolving their issues that currently threaten another government shutdown later this week. It seems likely that a shutdown will be averted. However, the negotiated bill still needs to be signed by President Trump. Since it only contains $1.375 billion of the $5.7 Trump originally demanded, at best, I think he will have to show his base a plan and expectation to fund the remaining balance needed to live up to his election promise. This will likely come in the form of talks of declaring a national emergency in order to take the shortage out of a portion of the budget that won’t require congressional approval.

 

With stocks now just beneath their 200-day moving average, it seems likely that they will challenge this critical level at some point during today’s trading session. This poses the greatest short-term risk to the near-term direction of mortgage interest rates. If this level is breached, we will see rates take a step higher. However, since breakouts are the exception and not the rule, odds continue to favor stocks retreating shortly after hitting this level. However, given the upward momentum over the past number of weeks, stocks may have the strength to break through. We need to be on guard for this to happen.

 

Given the continued strength in the stock market, we will maintain a locking bias.

Stock prices are climbing higher once again in early market trading, getting closer to approaching the 200-day moving average. This is a dangerous time for mortgage bonds, as a stock market break above this critical level would translate to higher mortgage interest rates in the near term. The key concern is that if the republicans and democrats can successfully negotiate a deal that will avert a second federal government shutdown, stock investors would see that as a positive sign for opportunities for the stock market to advance higher.

 

This is a relatively slow week for economic news, so markets will trade heavily based upon the technical outlook. At this point, the technical outlook isn’t looking great for the mortgage bond market. However, I see this as a temporary problem for interest rates. With a recession looming, more and more investors are starting to see the writing on the wall. With the Fed not having a lot of room to lower rates, the impact of a recession could be prolonged. In the long run, I see lower rates. In the meantime, take advantage of a no-cost loan if you can. Now is a great time to make the first step lower.

 

Given the strength of the stock market, we will maintain a locking bias.

The technical move in the stock market continues to drive prices further away from their 200-day moving average, which is great news for mortgage interest rates. This level is the most influential of all moving averages, and a break above this could set off a massive stock rally that could push mortgage interest rates higher. Since the ceiling has held so far, mortgage rates now have a nice tailwind behind them, which will hopefully lead to softening rates in the near term. However, we still need to be cautious, as stocks could reverse course and break above this critical level. Although I don’t believe that will happen, it remains a risk.

 

Global growth concerns continue to build steam, with more and more economists jumping on the Recession 2020 band wagon. I remain steadfast in my belief that both housing prices and mortgage interest rates cannot continue to grow at the pace both are projected to climb by. I believe one or both will fall. This goes against what nearly every economist believed just a couple of months ago. However, as time passes, more are aligning with this point of view each day. This will likely present a great opportunity for people who obtained a mortgage in the past year to make steps lower using our no-cost refinance model, which is the best strategy in a reducing interest rate environment.

 

Mortgage bonds have a little room to improve before hitting the next significant ceiling of resistance. Since the potential improvements are limited, there is little benefit in floating. If you do choose to float, do so only if closely monitoring the markets.

The 200 day moving average held stocks back from continuing their gains, which is great news for mortgage bonds. As long as this critical ceiling of resistance holds for the stock market, mortgage bonds should see improvements in the near term. However, stocks remain close to this level, which means they aren’t yet ready to claim defeat. We could see stocks make another run in the next couple of days to once again challenge this level. Unless we see a massive downward run in stocks, mortgage interest rates remain at risk.

The recent gains in the US stock market have widely been attributed to hopes of a trade deal between the US and China. Since this rally has been based on rumor, my thought is that we may see a sell off in the stock market when an actual deal is announced. Stock markets often trade based on what is expected, then reconsider their positions after the changes are formally announced. This is where the term, “Buy the rumor, sell the fact” comes into play. If this happens, it could provide the much needed boost the bond market needs to push mortgage interest rates even lower. I see good things ahead in the mortgage market.

With stocks remaining in risky territory, we will maintain our locking bias.

Today is a slow day for scheduled economic news, so the technical factors will once again drive the direction of the markets. This puts stocks in a strong position, for the moment. The concern is that stocks are now right up against their 200-day moving average. A break above this would not only be terrible for mortgage interest rates, but it would also represent another trend reversal. It has been many years since stocks have spent a considerable amount of time beneath this critical moving average. I believe it is time for stocks to soften. If they do manage to break above this level, I don’t think it will last too long. As more and more people are realizing the risks of a pending recession, investors, employers and consumers will all begin to take steps to prepare.

 

Tonight’s State of the Union could add volatility in the market’s tomorrow. Depending upon the direction President Trump goes, we could see either celebration or panic heading into tomorrow’s trading. It seems at this point that the President will not seek emergency funding for the boarder wall, which could mean that he will also give up the battle over the Federal government shutdown looking later this month. It seems that democrats remain unwilling to sign off on funding the wall, so another shutdown could just further hurt President Trump. This would be viewed as good news for the stock market, as a federal shutdown is not a good thing for the U.S. economy.

 

Given the risks of stocks advancing above their 200-day moving average, we will maintain a locking bias. We will assess the situation once again tomorrow and see how tonight’s speech will impact the near-term markets.

The technical move lower is continuing once again today for mortgage bonds. The good news is that there’s significant support just beneath current levels. If stocks don’t make a wild run higher, odds are that the support will help prevent bonds from falling much further. However, if support does give way, bond prices will take a big drop lower before hitting the next floor. Although I don’t expect that to happen, it is certainly a possibility.

 

As we unpack the data from last Friday’s Bureau of Labor Statistics (BLS) report, there are some signals of concern. First, I’m having a difficult time believing that the job market growth figure was not somehow tied to the federal government shutdown. Although I haven’t heard a single economist mention this, I can only assume that many furloughed federal workers took temporary employment elsewhere in order to put food on their tables when they were not working or getting paid. I will have to see next month’s report to see if the growth was legit or an anomaly. The key indicator that I’m watching out for is the Unemployment Rate. Immediately following the low point in an employment cycle, this rate has spiked significantly higher. Since we know that after hitting 3.8%, there is little room for continued improvement. Further, there is no reason to believe this cycle will be any different from all of those before.

 

Although I’m hopeful bond prices will hold, the safe play remains to maintain a locking bias.

The bond market is falling sharply today, adding upward pressure to mortgage interest rates. Although this is also a technical move lower (which I will explain in a minute), the market is reacting to the Bureau of Labor Statistics (BLS) report that showed there were 304,000 new jobs created in the month of January. Since this far exceeded the 158,000 anticipated, bond investors are clearly nervous about this headline report. Although there were negative revisions to the tune of 77,000 to the prior two months’ reports, the strength of the labor market is one key component the Fed looks at when deciding the rate strategy, and this component of the rate decision clearly supports higher rates.

 

In looking at the bond chart, mortgage bond pricing hit up against a strong ceiling of resistance provided by the 50% Fibonacci level. Since this is a standard stopping point in a market rally, (such as the one we have experienced in the mortgage bond market the past couple of months) a break above this would be a rare exception. Although I do believe we will eventually break above this critical level, I don’t see that happening without a very weak piece of economic or political news hitting the market. Since we knew the job number would at least come in ok, we could easily assume the next step would be for rates to deteriorate a bit in the near term.

 

We will take a deeper dive into the report in our market update on Monday. There are some key points of concern that we will analyze.

 

We will maintain a locking bias.

Financial markets got exactly what they were hoping for yesterday, with the Federal Reserve removing the language of “gradual rate hikes” from their dialogue. This came as a surprise to many economists who were expecting to see four rate hikes in 2019. Based on this, we can expect to see the Fed hold rates at current levels until there is enough economic data to support making a change in one direction or the other. Given the unknown implications of Brexit, the trade war with China, ongoing investigations into President Trump’s election and the implications of a government shutdown, I believe we will see rates have more stability, at least through March. This is great news for homebuyers looking to move when the purchase season heats up.

 

Tomorrow is another big day for the financial markets, with the Bureau of Labor Statistics (BLS) set to announce their estimates of new job creations in the month of January. Despite a strong report out of ADP, markets are only expecting to see a number around 158,000. This is well below the current trend of job growth. However, there are many factors this month that could have taken a toll on the labor market. For one, there were many private companies significantly harmed by the government shutdown. This could have adversely impacted the growth rate of new hires in January. Further, the first quarter of a new year generally doesn’t support strong growth. Therefore, this report could come in low.

 

Although the bond market is performing well today, the risk of tomorrow’s report is high. Given the risk, I’m going to maintain a locking bias.

Stocks are making a technical move higher, after bouncing off the floor of support. Overall, stocks are trading within a tight range as they look for reasons to make a break in one direction or the other. The outcome of which way they will go could be heavily influenced by the statements that will be made by the Federal Reserve at 2:00 pm EST. If the Fed backs down on future rate hike predictions, which I believe they eventually will, the stock market will celebrate that news. This will add upward pressure to mortgage interest rates as many investors will likely sell their bond holdings to invest in the higher potential gains offered by stocks.

 

A strong ADP report shows that job gains in the month of January came in at 213,000, which far exceeded the market’s expectations of 174,000. Of this total, 145,000 were added in the service sector alone. This is a strong indication for consumer spending, which heavily influences the direction of mortgage interest rates. This number now sets the stage for a stronger than expected report on Friday when the Bureau of Labor Statistics (BLS) will announce their estimate of new hires. Since the BLS is the more respected of the two, that one has a greater influence on mortgage rates, so we need to be careful as we head into that report.

 

With mortgage bonds under pressure, the safe play is to maintain a locking bias.