21 Jul Locking bias
Today is another quiet day for scheduled economic reports, so technical factors will once again drive the markets. The strong dollar continues to take its toll on international companies. Recent earnings reports from large international businesses such as IBM and United Technologies have shown weaker than anticipated earnings which is largely a result of the strong US dollar. The weaker earnings slowed the stock market, which has prevented stocks from setting new all-time high records. They did match all-time high levels yesterday, but were unable to make further advancements. So far today, stocks are showing continued weakness, making it unlikely that today will be a new day for the record books.
Commodity prices have taken a serious hit recently, as anticipation of a Federal Reserve rate hike takes its toll on inflation based assets such as gold. As the Fed moves short term interest rates higher, that provides protection against prices moving higher and is one of the Fed’s most powerful tools to manipulate price movements. Consequently, a move to stall inflation will also help keep mortgage rates in check. Since inflation is the arch enemy of a fixed return asset, such as a mortgage bond, when inflation is low, longer term interest rates remain low. When inflation moves higher, interest rates and commodity prices move higher as well. Therefore, the move lower in gold is a good sign for mortgage interest rates, as it shows that the markets are not anticipating high levels of inflation any time soon.
Bonds remain in the sideways channel they have been in for weeks now. However, they remain vulnerable to making another move lower. If bonds break beneath current support, they nearly 50 basis points to fall before finding support. Therefore, we maintain our locking bias.