Inflation Remains Low

Mortgage bonds are again at a critical juncture, as they attempt to break out of the viscous downward channel that has driven mortgage interest rates higher over the past few weeks. Coincidentally, bonds are also right up against their 200-day moving average.  If they are successful in managing this breakthrough, we could see a nice improvement to mortgage interest rates in the days and weeks to come.  However, we must be mindful that breakouts are the exception and not the rule.  Therefore, we are more likely to see bonds fall lower in the days to come than we are to see bonds improve.  If news of the week continues to show weakness, that could be the catalyst needed to make this happen.  For the sake of interest rates, slow economic reports will prove beneficial.

This week is an action-packed week for economic reports. The main highlights will be the Fed announcement concerning interest rates on Wednesday and the Bureau of Labor Statistics’ Jobs report that will be released on Friday.  In addition, the Federal Reserve’s main inflation report, the Personal Consumption Expenditures (PCE), was released this morning.  When striping out food and energy prices, it showed that inflation only increases 0.1% in the last month.  This anemic rate maintains an annualized rate of just 1.3%, which shows that inflation remains to be well below the Fed’s target rate of 2%.  With inflation still not an issue, this gives mortgage bonds room to improve.

If you choose to float, do so carefully. When at the top of a trading channel, the risk of a pullback is high.