Mortgage bonds remain trapped below their 200-day moving average and just above their 50 DMA. With stocks finally taking a breather, this is a good position for bonds to be in now. The announcement out of North Korea that another missile was successfully launched, this one capable of hitting New York or Washington DC, of course would cause panic and fear within the US stock market as the chances of continued escalation in the battle between the US and North Korea intensifies. At the current time, stocks are down. However, not dramatically. If talks of a proactive retaliation intensify, we could see stocks take a deeper cut, which would likely help improve mortgage interest rates.
The Employment Cost Index, which was old Fed Chairman Greenspan’s favorite gauge of inflation, was released this morning showing that wages grew by 0.5% in the second quarter of 2017. This was below expectations of 0.6%, and was not showing the strength of wage growth the Fed was hoping for. Year-over-year, the rate of growth was 2.4%. This is unchanged from the last reported figure, but below the 2.6% rate that was reported just many months ago. Clearly, wages have lagged in this economic recovery, which is a primary driver of the low rates of inflation we have been experiencing. With technology threatening to take millions of jobs in the next decade, we could be in for continued lag in the long term. However, wage growth is still expected to grow in the near term.
With mortgage bonds still beneath their 200-day moving average, the risk of floating is elevated. If you choose to float, do so only if you are able to closely monitor the markets.