Locking bias

Mortgage bonds ended the day higher in afternoon trading Tuesday, poking above the overhead resistance level we discussed in yesterday’s update.  However, there was a large gap down opening this morning, as bond investors digested more strong news with the job market and higher inflation data.  To begin with, ADP reported that there were 216,000 new hires in the month of November.  This was well above the 160,000 anticipated.  Given the seasonal hiring and the overall tone of the job market, it’s astonishing that the market was anticipating such a low number.  This increases the likelihood of Friday’s Bureau of Labor Statistics Jobs report coming in higher as well. 

We also received the Personal Consumption Expenditure (PCE) report this morning.  Since this is the Fed’s favorite gauge of inflation, it is closely watched by bond holders.  The Headline number moved up from an annual rate of 1.2% to 1.4%.  However, the Core rate, which strips out food and energy prices, remained the same at an annual growth rate of 1.7%.  Although this is slightly below the Fed’s target rate of 2.0%, there is an upward momentum in the direction of inflation.  Since inflation is the arch enemy of mortgage interest rates, a move higher will certainly be driving mortgage interest rates higher.  We must watch this number closely.

The bond market is once again at a critical point.  A break above current levels in the 10 Year Treasury Note market will cause interest rates to take another step higher.  The importance of this level cannot be understated.  Given the risks associated, we will maintain our locking bias.