17 Nov Locking Bias
Mortgage bonds started the day significantly higher in price (lower in rate). However, they have since been pushed into negative territory and again beneath support. Bonds have had a tough time catching a break for the past month, with prices moving slowly lower at a pace that is nearly unnoticeable at the moment but significant over time. The past couple of trading days have been slightly positive for bonds, which has helped stabilize mortgage interest rates. This has happened as the huge run up in the stock market appears to have crested. Stocks are now trading near all-time highs in a sideways pattern. From a technical standpoint, stocks appear to be vulnerable to a downward cycle. If this happens, it will be favorable to mortgage interest rates, as money will surely flow out of stocks and into mortgage bonds. That could mean better mortgage pricing ahead!
On the news front, we did get the Empire State Manufacturing Survey this morning, which measures manufacturing in the New York region. It was reported at 10.16, which was close to the markets’ expectations of 10.3. It was a nice rebound from last month’s weak reading of 6.17, so the market’s reacted favorable to the report. The report was led by an increase in new orders and shipments. Additionally, it showed that the 6 month outlook for employment doubled to 24.47, which is a good sign for predicting job growth in the months to come.
Both Industrial Production and Capacity Utilization were reported weaker than expected. Capacities at factories dropped down to 79.3% from 78.9%. As capacity increased at factories it helps keep inflation lower, as factories are able to get more accomplished with less investment of labor. Therefore, this is not a positive report for the bond market.
With mortgage bonds being unable to maintain above support, we are still not yet seeing the strength needed in the bond market to make a run higher. It is very possible that bonds will push back above resistance today if the stock market continues to struggle. We will start the day with a carefully floating bias as we watch and see how the bond market performs today. Should pricing erode as the day progresses, we will certainly switch to a locking bias. If you choose to float, keep your eye on the market and be prepared to lock.