Another move higher in the stock market is adding pressure to the bond market this morning, with the DOW now up 100 points. July is typically not friendly to the stock market. However, the DOW currently has had its best monthly gain since February. The stock market’s strength has greatly increased volatility in mortgage pricing, and will likely continue to dictate the direction of mortgage rates in the near term. As the stock market improves, investors are selling bonds to purchase stocks. This is why interest rates and stocks tend to move in the same direction.
Today is a quiet news day, so the markets will take direction from the technical picture and the stock market. Economic reports heat up as the week moves on, with a reading on inflation on Thursday. Therefore, this could be a volatile week. Chances are that earnings reports and economic activity will be reported to be stronger than expected, which would pressure interest rates higher.
Mortgage bonds have violated a significant floor of support at the 50 day moving average, and are poised to move to the next floor of support. With an unreasonable level of strength building in the stock market today, we are going to suggest the safe play of a locking bias. Hopefully, mortgage bonds can find their way back above the 50 day moving average at some point this afternoon. A close below this level would be a negative indication for mortgage rates.