Floating is too great

This morning’s release of a stronger than expected GDP report rocked the bond market, with a 4% 2^nd quarter of 2014 growth rate.  The market expected a strong 3.1%, but the real figure was far beyond expectations.  It is worth repeating that the two most influential determining factors of mortgage interest rates are GDP and CPI.  As Gross Domestic Products and the Consumer Price Index move higher, mortgage rates will most definitely follow.  As a result of the strong report this morning, mortgage bonds broke beneath multiple layers of support, and are not at risk of breaking a significant support level that has held bonds for many weeks.  Should this support give, we have the potential of another steep fall.

The ADP Employment Report for the month of July was released this morning, luckily for the bond market, it came in at 218,000.  This was below expectations of 235,000, and shows that summer job growth has slowed.  There were no revisions to last month’s report of 281,000, so overall, the impact on the market was virtually none.  The Mac Daddy job’s report comes this Friday morning, when the Bureau of Labor Statistics will release their estimate of job growth.  That has a strong potential to rock the markets as well.  However, ADP has been much more accurate in their estimates lately.  Hopefully for mortgage rates, they are close this month as well.

As if we haven’t had enough news releases today, we still have the results of the two day Fed Meeting to be announced this afternoon.  We fully expect the Fed to taper QE by another $10B, bringing their monthly purchases to $25B in mortgage backed securities and treasuries each month.  However, there is no chance of a hike in short term interest rates.  This could add significant volatility to an already rough day in the bond market.

Given the continued downward pressure in the bond market, we are going to continue our locking bias.  We are hopeful that current support can hold.  However, the downward force is strong, and the risk of floating is too great.