Locking bias

Mortgage bonds continue to tread water this morning, as the stock market decides whether or not to continue their losses from last week.  Today is a light economic news day.  However, tomorrow things will begin to heat up when we receive an updated reading of the Consumer Price Index (CPI) for the month of November.  The market will be expecting a Core Rate increase of 0.2%, which could prove to be problematic for the bond market.  Since the reading 12 months ago was only 0.1%, a growth of 0.2% would push the year-over-year Core Rate up to the psychological 2.0% level.  That could be the last piece of justification needed for the Fed to raise interest rates, which could cause a selloff in the mortgage bond market.

We did receive a bit of news this morning in the form of the Empire State Manufacturing Index, which measures the rate of manufacturing in the NY region.  The results showed a disappointing reading of -10.4.  This is the 4^th straight month that the index has been negative.  However, since this report is limited to a small portion of our country, this does not necessarily correlate with the national rate of growth.  Therefore, it is taken with a grain of salt as investors digest the news.  Since manufacturing typically picks up in advance of the holiday season, it does present a bit of concern as to how strong retail sales will be this season.

With mortgage bonds facing a high level of risk with tomorrow’s CPI report, we will maintain our locking bias.