China Showing More Signs of Trouble

After another failed attempt to break above its 25-day moving average, the US stock market is getting hammered once again in early market trading. This is not a good sign for those hoping for an end of year recovery in the market. If stocks once again test the floor of support, the floor will continue to weaken until it finally breaks through. Think of this as a hammer hitting a window. Although it may bounce off the glass the first several times it makes contact, with each hit the glass is weakening. Eventually it is going to break. When the floor that has held stocks up finally gives, we will see a more dramatic move to the downside, which will help add a nice tail wind to drive mortgage interest rates lower. It may not happen soon, but I believe it will eventually happen.

Weak economic reports out of both China and Europe have the US markets nervous of a global slowdown this morning. China’s industrial output and retail sales were the lowest they have been since 2003. When you consider that is even lower than what was reported during the great recession of 2008, that sheds light to the severity of the current headwinds facing the Chinese economy. Clearly, the trade war between US and China is taking its toll. If this isn’t resolved quickly, the overall global economy will suffer.

Mortgage bonds remain trapped between their 200- and 100-day moving averages. If they remain above their 100, there is no need to immediately rush to lock. However, the potential improvements are minimal. Given the risk/reward tradeoff, we will maintain a locking bias.