Gambling is too risky

A critical moment for interest rates –

After Friday’s lackluster BLS Jobs Report, the Federal Reserve is in a bit of a conundrum.  With the expectations for the Trump Administration to stimulate economic growth diminishing, combined with lower expectations for inflation, it seems that low rates may be around much longer than most predicted.  As oil prices continue to sag, and wages fail to climb higher during the tightest job market we have had in 16 years, the Fed’s expected path may not come to fruition. With more people leaving the labor force than entering last month, our economy is not showing encouraging signs that would allow the Fed to comfortably raise interest rates. Even though, we still anticipate the Fed will raise short term rates 1/4% when policy makers meet on June 14th.

The US stock market continues to ignore potential signs of economic trouble, as stock prices remain near all-time high levels. At some point, it seems that stock and bond market investors should be on the same page. With bond prices heading back down to pre-Trump election levels, stock prices continue to claw their way higher.  It seems unreasonable for such discrepancy to occur.  Which market is right?  I guess time will tell.

Mortgage bonds are now at a critical pivot point, holding just above their 200-day moving average. However, as widely discussed in last week’s updates, it’s too early to pop the champagne.  For bonds to remain above their critical level, we would need to see a few days of bonds holding their ground. Odds remain that bonds will fall lower, as a trend reversal seems unlikely at the current time. Not to say that it won’t happen. However, it would be rare.

Until we have a clear view supporting improving mortgage interest rates, the safe play remains locking. If you choose to float, do so only if you can closely watch the markets. Gambling at this point is risky.