31 Oct Locking bias
The battle over the 200 day continues today for mortgage bonds. Although mortgage bonds have held ground and stayed above this critical level, the writing is on the wall. It seems likely at this point that the battle will ultimately be lost and mortgage bonds will break below. This will likely cause bonds to fall at least another 100 basis points, pushing interest rates 1/8% – 1/4% higher in the process. The losses can be expected to mount until after the Federal Reserve raises short term interest rates. The push higher in rates could be the catalyst to finally stop this brutal slaughter process that we are currently amid. Although the Fed is meeting this week, don’t expect a rate hike announcement now. There is virtually no chance of the Fed being viewed as making a political move so close to the presidential election. Therefore, we must wait until December to get the much-needed hike.
This will be an action-packed news week, which started with this morning’s PCE (Personal Consumption Expenditures) and Personal Income and Personal Spending reports. Overall, the report wasn’t stellar. Headline PCE as measured annually increased from 1.0% up to 1.2%. The Core Rate, which strips out food and energy prices and remains the Fed’s key measure of inflation, remained unchanged. Personal Income rose by 0.3%, which was below expectations of 0.4% and Personal Spending increased by 0.5%, which was in line with expectations.
With mortgage bonds still battling their 200 DMA, we will maintain a locking bias. If bonds are not able to stay above this critical level, hold on to your pants, it could be a rough fall.