Be very cautious if you choose to float into tomorrow

Stocks once again open the day setting new all time high records.  This move higher has proven to be one of the strongest in history, with a relentless climb that started on October 16th still not showing signs of slowing.  Mortgage bonds have so far held their ground well and are still sitting above a duel level of support.  This is a strong showing for the bond market, as a strong stock market has a tendency to deteriorate the bond market.  In spite of the strength of the stock market, bond investors aren’t as optimistic about our economy as the stock market appears to be. History shows that stock investors tend to chase the all mighty dollar at any risk, while bond investors tend to be more realistic about economic conditions and underlying risks.

There isn’t a lot of economic news releases today, so technical factors will likely drive the markets.  Of the limited news reports of the day, the PMI Service Flash for November came in at 56.3.  This was below expectations of 57.8, and also lower than last month’s reading of 57.3.  This is an early estimate of the Services Purchasing Managers’ Index (PMI) for a country, designed to provide an accurate advance indication of the final Services PMI data. This is among one of the first economic indicators for each month which provides evidence of changing economic conditions.  Therefore, this month’s drop may indicate slowing conditions ahead.

As long as the duel level of support continues to hold, we will have a floating bias today.  However, if the strength of the stock market begins to take its toll on the bond market, bonds could be pressured beneath support.  In that case, we will switch to a locking bias.  We also need to be cautious about going into tomorrow’s heavy news day.  Most importantly, we will be getting a reading on GDP which could create volatility in the market.  The two primary drivers of mortgage interest rates come down to GDP and consumer inflation.  A surprise higher in either of these two reports have the potential to upset the markets and boost interest rates higher.  This must be considered if you plan to float into tomorrow’s report.