12 Nov Locking bias
Stocks are pointed lower so far this morning after a weaker than expected earnings report from Macys and reports that Russian troops have entered Ukraine. Although Russia denies the report, the markets are not feeling the love for Russia and are skeptical of their words. Mortgage bonds have once again broken beneath the support that has kept rates from moving higher. If bonds close the day beneath this critical support level, they may be in for a more dramatic fall down to their 50 day moving average which is 43 basis points below current levels. However, bonds spent the majority of last week below support without falling. Therefore, there is hope that they can maintain current levels until they have the strength to make another move higher.
The National Federation of Independent Business (NFIB) released their Small Business Optimism Index this morning. The report showed an impressive reading of 96.1, which was higher than the markets’ expectations of 96.0. It was also higher than last month’s reading of 95.3. The continued optimism of small business owners has been reflected in the job growth figures of late. As business owners become more optimistic about the futures of their companies, they tend to add additional labor force to their payrolls. This is a strong contributor to overall economic growth. However, it has still not yet led to a noteworthy increase in wages. The lack of wage growth has been healthy for employers and job growth, but not necessary for households who could use a little extra cash each month.
Mortgage bonds have still failed to show significant strength. However, mortgage bonds are receiving support from the 10 Year Treasury Note which has had a drop in yield of 3 basis points so far today. If bonds are able to break above support, they could be ripe for a nice run higher. It has been several weeks since bonds have experienced a rally. This has been due to an excessively exuberant stock market. Bonds are certainly due at this point. Until we see bonds show more strength, we will continue with our locking bias. Watch the markets closely, however. If the stock market makes a more dramatic drop lower, bonds will certainly benefit.