28 Jul Locking Bias
This is a week filled with financial news reports, with the highlights being Wednesday’s Fed Meeting and Friday’s Bureau of Labor Statistics Job’s Report. Pending Home Sales were released this morning, showing a disappointing drop of 1.1% on a month-over-month basis, and a 4.5% drop on a year-over-year basis. The longer term loss wasn’t much of a surprise, as we all know the impact higher mortgage rates have had on the housing market since last summer’s jump higher. However, the drop from last month wasn’t anticipated, as rates have held steady and we are still in the strongest buying months of the year.
The stock market is struggling this morning. We see continued signs of a pending stock market correction building. However, it is difficult to predict when this will happen. At this point, we feel it is just a matter of when. When we do see a stock market correction, we will likely see an improvement in the bond market, as money typically flows into bonds as stocks are sold off, vice versa. The competing nature between stocks and bonds creates a situation where one does well when the other struggles.
Mortgage bonds are right beneath a double layer of resistance. Continued weakness in the stock market could help propel bonds higher. However, strong resistance statistically has a greater chance of pushing bonds lower when challenged. Given the volatility in the market, we are going to suggest a locking bias. However, if bonds muster the strength to move higher, there is some room for bonds to improve a little before hitting the next point of resistance.