Mortgage bonds remain trapped beneath a strong ceiling of resistance. Given the damage that has been done to the U.S. stock market in recent days, this ceiling really should have been broken. In taking a historical view, this level has been challenged many times just to force bond prices lower. There is one time in the past 15 months that prices were above this critical level, and that was very short lived. If the sharp drop in the stock market, combined with the threat of an on-going trade battle with China isn’t enough to help push bond prices above this level, it’s hard to say what will. We have a report on consumer inflation due out tomorrow. If the reading is low, that may help inspire a rally. The good news is that if bonds can make a strong break higher, we will see mortgage rates improve to 15 month or better lows.
This morning we received an update on the Producer Price Index (PPI), and it came in below what the market was expecting. Although producer pricing doesn’t necessarily directly impact the consumer inflation levels, it is considered a forward indicator. The big news will come tomorrow when the Consumer Price Index (CPI) report is released. If that shows that consumer inflation levels are below what the market is expecting, we could see mortgage bonds muster the strength to make a break higher. That would help improve mortgage interest rate pricing. However, since a breakout is the exception and not the rule, we will continue to play it safe.
Unless bond prices break above the aforementioned levels, we will maintain a locking bias.