The US stock market experienced dramatic swings last week, but managed to close just shy of all-time high levels. The dramatic improvement came after the Fed speech eased fears that rate hikes would happen quickly and sharply. Based on the comments made, it is now assumed that although a rate hike may still happen in 2015, the rise in short term interest rates will be slow and only when supported by higher levels of inflation. This was welcomed news to both the stock and bond markets. As a result, stocks surged higher and mortgage rates improved by about 1/8% on the news. Fortunately, the gains in both markets are holding. This puts mortgage bonds in a great position to build up strength to make another run higher. If this happens, we could challenge the interest rate lows we saw back in January.
Although today is low on economic reports, this week will be packed with important reports that could influence the near term direction of interest rates. Tomorrow will bring a report on The Consumer Price Index (CPI) as well as a Fed speech by one of the more bullish members. The CPI report could be more impactful than past reports since the Fed specifically said that they will wait for inflation to move higher before making significant changes to short term rates. Therefore, a higher than anticipated report could signal an expedited rate hike and a more rapid climb higher. However, if inflation is showing signs of continued weakness, the market will anticipate a more cautious approach with slower rates of hikes.
With mortgage bonds currently resting above support, we will suggest a cautiously floating bias for the moment. However, even if bonds perform well today they could still start tomorrow under pressure. Today is a great day to lock. If your close date is approaching, we suggest locking in the recent gains. As we know, losses can happen quickly and without notice.