Break Out Confirmed

Mortgage bonds were able to close out yesterday just above the head and shoulders pattern that was critical for them to maintain their position above.  This bullish move helps bonds to stay out of the steep downward trading channel that drove mortgage rates higher for more than two months.  There is now a clearly defined sideways channel in which bonds are trading.  I don’t see bonds having the strength to break above this range anytime soon.  However, I’ll take a sideways channel over the downward trend any day.  Unfortunately, bonds are now at the top of the sideways trading channel, which means we can anticipate the next move to take them to the bottom.

The news of the day was overall on the negative side for the bond market, beginning with Personal Consumptions Expenditures (PCE) coming in a bit hotter than anticipated.  The Core Rate, which strips out food and energy prices, rose 0.3%.  This is 0.1% hotter than the market expected.  However, the year-over-year number remained steady at a tame 1.5%.  Because the monthly rate would amount to a 3.6% YOY rate if continued, the market is reacting a bit negative to the report.

Secondly, PCE private sector wages were up 0.5% on the month, and 5% on a year-over-year basis.  This represents the third month in a row where wages averaged a YOY rate of 5%, which means that wage growth in the U.S. economy is real.  Although President Trump doesn’t expect this to raise overall consumer inflation, it does add upward pressure to the arch enemy of mortgage interest rates – higher consumer prices.

With bond prices at the top of the trading channel, we will maintain our locking bias.