Floating at this level is very risky

It’s a busy news week this week, highlighted by Friday’s Bureau of Labor Statistics (BLS) Jobs report.  Given the recent trend of stronger than anticipated job growth, the market will certainly be closely watching Friday’s report to see if the strength in the job market continued throughout the month of March.  A stronger than expected report could be enough to push the Fed over and create another move of .25% increase to the Fed Funds Rate.  According to Morningstar, on 3/24/16 the chances of an April rate hike were sitting at just 14%.  However, those numbers are moving higher as certain members of the Federal Reserve continue to make their case for higher rates.  A strong employment report would certainly cause some traders to change their positions in anticipation of a possible move by the Fed. 

This morning we received updated readings on Personal Consumption Expenditures (PCE) as well as on Consumer Spending.  With PCE being the Fed’s favorite gauge of inflation, this is a significant report to the market.  The Headline PCE number for the month of February was reported to be -0.1%, which was in line with estimates.  Core CPE, which strips out food and energy, was +0.1%, which was slightly lower than the +0.2% increase anticipated.  Year over year PCE is 1.0% and Core PCE is +1.7%. 

Personal Income and Spending was reported this morning.  Personal Income was +0.2%, which was stronger than the +0.1% anticipated.  Consumer Spending was +0.1%, which was in line with estimates. 

Mortgage bonds are performing well so far this morning.  However, they are currently just beneath overhead resistance of the 25 and 50 day moving averages.  This makes floating at this level highly risky.  If bonds are able to muster the strength to make a break higher, that will be great news for mortgage interest rates.  However, given the risks associated with a likely push lower, we will maintain our locking bias.