As expected, mortgage bonds closed the gap identified in yesterday’s market update. They bounced off the bottom of the trend downward trading channel and have improved significantly. This strong move is a sign that bonds should now travel to the top of the trading range. But where they go from there is yet to be seen. If tomorrow’s Consumer Price Index (CPI) report shows inflation below the market’s expectations, bonds may continue to rally and break out of the nasty channel that has driven mortgage interest rates higher. Today’s Producer Price Index (PCI) report came in well below the market’s expectations, which is adding hope that we will also see lower inflation on the consumer level as well. Let’s hope for that, as bonds need some love right now.
Stocks are blazing higher, setting new all-time high records once again. Further hurting the bond market is the oil market, which recently surpassed $70 per barrel for the first time in three years. This is an inflationary move, as oil prices directly impact the price consumers will pay for goods and services. The greater the manufacturing and delivery costs, the more likely retailers are to pass the additional expenses on to the consumer. Hopefully, the recent corporate tax rate reduction will allow retailers to share some of the savings with the consumer. This would help lower overall inflation rates, as consumer prices fall.
Bonds are climbing higher and should soon hit the top of the tight trading channel in which they are ranging. Once they hit this critical level, we can expect prices to soften and upward pressure on mortgage rates once again being applied. Therefore, it remains a great time to lock.