Mortgage Mike’s Daily Rate Commentary

Mortgage bonds continue to trade within a tight range, as markets look for direction from the stock market. Although stocks are trading higher in early morning trading, there are the 25- and 200-day moving averages just above current levels. This means we will likely see stocks stall out here at some point today, as there isn’t likely enough good news to push stocks above the multi-layer ceilings. This could present an opportunity for mortgage bonds to improve, as many investors will temporarily shift money out of the stock market and into mortgage bonds. However, we still aren’t out of the woods. Stocks could make a strong come back in the days or weeks to come, which would likely drive mortgage interest rates to set new multi-year highs.


The consumer price index (CPI) for the month of October was reported this morning, showing a year over year increase in overall consumer inflation from 2.3% up to 2.5%. However, after adjusting for food and energy prices, the Core rate fell from 2.2% down to 2.1%. Since both components of the report came in as the market anticipated, there was very little reaching in the bond market.  This is good news considering that tariffs are driving more products being produced here in the US, which is generally more expensive than products produced in China. If the production prices in the US continue to climb higher, we can anticipate that will eventually lead to higher prices charged to the consumer. Overall, tariffs are inflationary and not friendly to mortgage interest rates.


With mortgage bonds having room to improve, there is no need to immediately lock. However, we need to be careful of the longer-term outlook. If stocks can muster a strong relief rally, that will come at the expense of mortgage interest rates.

Stocks are significantly higher in early market trading this morning, as they attempt to recoup the heavy losses they absorbed yesterday. The 600+ point loss the DOW took yesterday was supposedly fueled by fears of a soon to be democratic House pursuing further investigations into President Trump’s ties to Russia and whether there was collusion. The losses pushed stocks back beneath their day moving average, which could not serve as a ceiling of resistance as stocks attempt to climb higher. This could provide an opportunity for the bond market, assuming stock are not able to break above this critical level. It could mean that more losses are in store for the stock market.


The good news of the day is surrounding hope that the trade disputes between the US and China will soon be minimized, on reports that China’s Vice Premier Liu He will ensure a meeting between the leaders of the two biggest economies in the world. Given that trade war concerns have been the cause of massive swings in the US stock market, it seems that a resolution between the two major economies would help provide some stability for stock prices. In the meantime, we will continue to deal with the swings in hopes of an agreement to be made soon.


With mortgage interest rates still grinding against the ceiling of multi-year highs, there is great risk in floating. As a result, we will maintain a locking bias.

After a failed attempt to break above its 100-day moving average, the stock market is taking losses in early morning trading. This is helping support mortgage bond pricing, which typically moves in opposition of the stock market. This is somewhat surprising considering this morning’s Producer Price Index (PPI) report showed that inflation on the producer side was much higher than the market anticipated. Although Producer inflation doesn’t necessarily trickle down to the consumer level, it is certainly a strong forward indicator of higher consumer inflation. We will find out Wednesday when the Consumer Price Index (CPI) report is released.

Yesterday’s Federal Reserve announcement was just as planned, with the Fed opting not to hike rates at this time. However, as we feared, the short announcement made by the Fed following the release confirmed the path of continued, gradual rate hikes and sets the stage for one final hike in 2018 when the Fed meets next in December. The scary thing about this next hike is that it could be the one that inverts the yield curve. History shows that once a yield curve is inverted, a recession is imminent to follow within a year or two. Although I don’t agree with the Fed’s decision to continue hiking, there certainly is enough inflation concern to justify the move. I feel that a recession is already imminent, and further rate hikes will expedite the process and cause it to be a harder recession when it does hit. We are not in the uncomfortable space where the general population hasn’t accepted the reality of a pending slow-down, so it continues to pressure the economy into irrational levels. That will soon change.

Although bonds are performing well this morning, there is little hope of prices making significant gains today. We will maintain a locking bias.

Mortgage bonds are near flat for the day, as they dangerously ride along at the lowest levels we have seen in more than seven years. Since this translates to the highest mortgage interest rates have been in more than seven years, this isn’t a good position to be in. At the close of the market today there will be a bond coupon rollover. This is significant because it likely will push the price of mortgage bonds below the seven-year low, which is significant only from a technical picture. At the end of the day, we need to plan for mortgage interest rates to climb even higher in the months to come.


The Federal Reserve is set to announce their interest rate decision today. Although there is no chance of a rate hike being announced, it is likely that they will set the market up to anticipate a hike when they meet next in December. If this happens, which I believe it will, this will be the fourth interest rate hike in 2018. Since the market was only expecting a total of three hikes this year, the additional hike could have a greater impact because not all investors priced that into the market beforehand. This could cause the 10 Year Treasury Note yield to step up even higher, which will likely trickle down to higher mortgage interest rates as well.


With the technical picture not looking good for mortgage bonds, we will maintain a locking bias.

Stocks have not only broken above their 200-day moving average, they have made a dramatic leap above this critical level. We’ve anticipated this move since stocks made their first multi-week break beneath their 200 DMA for the first time in several years. We will now have to wait and see if the run higher in stocks pushes prices up to once again challenge new all-time high levels. Given the traditional patterns of the stock market, stocks should run up to at least their 100-day moving average before hitting significant resistance. A break above that level will likely trigger a rally that could set fresh all-time highs.


Mortgage bonds are also performing well today, which goes against the traditional pattern of stocks and bonds performing in opposition of each other. The challenge for the bond market will be whether it is able to break out of the downward trading channel that has been in place for roughly the past two weeks. I think the strength of the stock market will end up taking a toll on the bond market, so my hopes of making a decisive break out of this downward trading channel aren’t very strong. I suspect bonds will face a strong ceiling and bounce lower in the near term. This would cause upward pressure on mortgage interest rates. Hopefully, I’ll be proven wrong.


Given the ceiling of resistance just above current levels, I feel a locking bias is prudent.

The US stock market came out of the gates strong this morning, looking to once again challenge its 200 day moving average.  Since stocks have found stability just below this critical moving average, there will likely be very far fewer sell orders triggered as stocks run up against this level.  However, I don’t anticipate stocks to break this level upon their next attempt.  I suspect it will take a few more tries before there is much hope for stocks to make another significant run.  When this does happen, we can expect to see a significant headwind on the mortgage bond market, which could push mortgage interest rates to set new multi-year highs.  Be on guard and watch the market closely if you are needing to lock a rate in the near future.


Today is an important day for both the stock and bond markets, with mid-term elections and a Fed interest rate decision both slated on the calendar today.  Although there is zero chance of a Fed rate hike, markets will closely be listening for any change in verbiage following the Fed statement.  As for the elections, Democrats are feeling confident they will take the Senate back, which could cause a headwind for President Trump and the execution of his agenda.  The stock market could react negatively to a Democratic win, which could help support bond prices tomorrow.  In the meantime, markets will likely be hesitant to make any significant moves.


Given the unknowns of the election reaction, we will maintain our locking bias.

Mortgage bonds are hanging in so far this morning, holding mortgage interest rates right at more than a seven-year high. This is an uncomfortable and critical position for mortgage bonds to be in. If bond prices fall beneath current levels, we could see bond prices make another large fall. Since bonds are now in waters that haven’t been chartered for more than seven years, we must go WAY back in time to find support that could slow the price drop. Let’s hope prices hold and gain positive momentum from here.


Stock prices are holding near flat-line this morning, holding just beneath their 200-day moving average. I would expect stocks to make another run at this critical level at some point this week. My guess is that they will eventually make it above this level, even if they first must go through a couple more failed attempts. When stocks do exceed this level, that will add a significant headwind to the bond market, as investors will likely sell bonds to take advantage of the opportunities of the stock market. That could be the catalyst for mortgage interest rates to set new multi-year highs.


With bond prices holding, there is no need to immediately lock. However, I see little hope of rates making significant improvements. Therefore, we will maintain a locking bias.

Mortgage interest rates are setting new 7-year highs this morning, fueled by a much stronger than anticipated report from the Bureau of Labor Statistics (BLS) on the number of new jobs created in the month of October. While the market was expecting only 188,000, the actual number came in at 250,000. It’s surprising to me that the estimate was as low as it was. When you consider that retailers are adding staff to support the holiday shopping demand and that the three-month average number of new hires is 218,000, the number anticipated should have been higher than it was. Hopefully, November’s estimate will be higher to reflect the reasons referenced above.


The US stock markets hit their 200 day moving averages and were immediately pushed lower. This is largely due to pre-programmed sell orders that triggered just before stocks hit this critical level. With nearly 1/3 of the market passively invested in funds that track the index, the ease of predicting such moves has become simple. I believe it will take the stock market at least three attempts before it has a shot of breaking above this level.


Another key concern in the BLS report was the Average Hourly Earnings, which increased from 2.8% to 3.1%. This climb higher is a pre-curser to higher overall inflation, as wages are one of the greatest determining factors in predicting the direction of near-term inflation numbers. Since inflation is the arch enemy of mortgage bonds, this is not good news for mortgage interest rates going forward.


We will clearly maintain our locking bias.

The stock market continues to recover their losses this morning, inching closer and closer to its 200-day moving average. Once it hits this critical level, stocks will face a challenge that could dictate whether stocks are truly in the beginning stages of a bear market or if this was just a short-term correction that will help stocks build the strength to eventually set new all-time high levels. Although I am long term bearish on the US stock market, I’m not yet convinced that now is the time when the trend will reverse. I see a 60% probability of stocks building strength and continuing to climb higher. However, my guess is nothing more than that, a guess.


Tomorrow is a HUGE day for both the stock market and for mortgage interest rates. It is the day when the Bureau of Labor Statistics releases their estimate of new job creations for the month of October. Part of the reason I’m leaning towards stocks recovering all their losses is that I feel the odds are probable that the report will show a stronger than expected labor market. When you consider that we are heading into the strongest retail season of the year, it seems likely that many will have already started to hire to have enough trained staff by the time consumers hit the malls for their holiday shopping. I will let you know the results in tomorrow’s market update.


Although bonds are performing well today, we feel it is prudent to lock in ahead of tomorrow’s report.

It’s another strong day for the US stock market, with the S&P 500 currently 50 points higher on the day. More importantly, they are now within a stone’s throw of their 200-day moving average. Given that stocks have spent very little time beneath this critical ceiling of resistance, they could easily be pushed back above. That would likely trigger an even stronger rally in the stock market, which I feel is a probable occurrence. Much will depend upon the results of Friday’s Bureau of Labor Statistics (BLS) report that will be released on Friday. If the results show an exceptionally strong labor market, that could provide the needed trigger for stocks to rally.


This morning’s ADP report showed that 227,000 new jobs were created in the month of October. This is much higher than the 178,000 the market was anticipating and could set the stage for a strong BLS report on Friday. It seems that recent months have shown the BLS report to be lower than ADP. We could see a “make-up” month where the BLS report comes in even higher than ADP. We must be on guard in case this happens.


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