26 Nov Happy Thanksgiving
Mortgage bonds are continuing their move higher this morning, while stocks are just beneath all-time highs. With the exception of a number of hours in the month of October, mortgage rates are at their best levels in 16 months. Bonds have formed a clear upward channel that is moving closer to resistance. It may take a breakdown in the stock market or another financial blow to the markets to help boost bond prices above these levels. Mortgage bonds are currently receiving support from the 10 Year Treasury Note Yield, which has fallen beneath all moving averages and is now preparing to challenge another floor of support. A break beneath support on the 10 YTN yield will be very bullish for mortgage interest rates and could help us get into a range where rates will be able to take a step lower. However, it’s too early to say if this will happen or not. All we can do is watch the markets and see how things play out.
We had weak economic news reported this morning, with the most significant report being Personal Consumption Expenditures (PCE). This is a reading on consumer inflation, and the Federal Reserve’s favorite gauge on upward price movements. Fortunately for interest rates, only tepid signs of inflation are present. It showed a measly 0.1% month over month increase. The Core Rate, which stripes out food and energy, showed an increase of 0.2% (given the low gas prices at the pump, it was a bit of a shock to see this rate higher than the headline rate). Year over year, the Headline rate is now at 1.4% and the Core Rate is at 1.6%. This is well below the Fed’s target rate of 2%, so there is no fear of an immediate rate hike by the Fed.
Personal Income and Spending were also released. Both were beneath expectations. Income and Spending were up 0.2%, which was less than the 0.4% and 0.3% respectively. Since spending is the lifeblood of our economy, it is never a good sign to see spending slowing. This does not support stronger economic reports in the near future.
Mortgage rates are heading in the right direction at the moment. Therefore, we will maintain our floating bias to see if bond can muster the strength to make another move that will help lower interest rates. However, since we are at the top of a trading channel we must be cautious. The resistance overhead could prove to be formidable. Therefore, we want to ensure that we don’t miss the current opportunities at hand to take advantage of the lows of the past 16 months. Watch the markets closely if you choose to float. Should sentiment reverse, lock quickly.
My team and I are grateful for your friendship, business and support. We wish you a wonderful Thanksgiving. Although the markets will be open for a shortened trading day on Friday, we will be taking the day off. We will be back with our next market update on Monday.