28 Jul Locking Bias
Mortgage bonds opened the day significantly lower, breaking through multiple floors of support and falling below the upward channel that has helped improve mortgage rates the past couple weeks. The drop in the bond market was fueled by a build-up of strength in the US stock market which has pushed stock prices higher. The upbeat mood in the US stock market has surprised many economists given the recent losses sustained in China’s stock market. In fact, the situation in China is nearly matching the devastation the US markets experienced back in 1929, a time that is referred to as the Great Depression. With China being a significant owner of both US debt and US assets, the spill over could create problems for the US down the road.
Federal Reserve policy makers begin their two day meeting today, with a rate decision being made tomorrow. Although there is very little chance of a rate increase announcement, investors will be listening with both ears for any hint as to what the Fed is thinking. It seems likely that we will see a Fed rate hike at some point before 2016, with September being the most likely time frame. You can be certain that the Fed will be discussing challenges in the US economy balanced by the upbeat momentum in the US job market. Although the Fed believes the US market not only can handle a rate hike, it also believes a hike is needed to help maintain a sustainable growth rate. Without a hike, the current path of growth is too strong to sustain long term.
With bonds fighting to hold above support, the safe play is to maintain a locking bias. Tomorrow’s Fed announcement could certainly shake the markets up a bit. Fed Day tends to create significant volatility with wild market swings.