Mortgage bonds remain trapped in between the 200 day moving average as a ceiling and 50 DMA as a floor. This wide range provides the markets with room to make large swings in either direction, as we have seen the past few days. Today is again another day of large movements, with bonds bouncing off the floor and shooting higher into the middle of the channel. It is unlikely that we will see any significant move before tomorrow’s big Bureau of Labor Statistics (BLS) Jobs Report. If the results of tomorrow’s report are significantly different than the market is anticipating, we could see bonds either break above the ceiling or below the floor.
It was reported this morning that 270,000 new claims for unemployment benefits were filed last week. This was a rise of 3,000 from the prior week. Although an important number, the most significant report on unemployment claims was a couple weeks ago, which is referred to as the “Sample Week” for computing the BLS report will be released tomorrow. Because the sample week happened to be at multi-decade lows, that will help support a stronger job growth figure for the month of July. In addition to the number of jobs created and the Unemployment Rate, the market will be closely watching for an increase in the Hourly Earnings report as well as the Hours Worked figure. If those are higher than anticipated, that would signal a stronger likelihood of inflation in the near term, which will spark fear in the bond market and cause mortgage rates to rise.
We feel that the prudent strategy is to lock before the release of tomorrow’s report. If the report is stronger than anticipated, that will cause bond prices to fall and rates to move higher. However, we feel that a weak report could also cause the bond market to fall and rates to move higher, as that could be perceived as a sign the Fed will delay a rate hike. At this point, the bond market is hoping for a rate hike to help curb the potential of higher inflation in the near future. Therefore, this is a more challenging report with a lower likelihood of a good turnout for the bond market.