Locking bias

Stocks are rising and mortgage bonds are dropping so far this morning, following strong employment news and an uptick in consumer inflation.  To begin with, Unemployment Claims for the week ending 10/10/15 were reported at a 42 year low!  It was reported that only 255,000 new claims were filed.  Since claims have not been this low since 1973, this shows continued improvement in the US job market.  Next week’s report will be used as the “sample week” by the Bureau of Labor Statistics (BLS) in computing their job growth numbers for the month of October.  If that week shows another low number, that will help support stronger job growth numbers, which could be harmful to mortgage interest rates in early November.

The Consumer Price Index (CPI), which measures inflation on the consumer level, showed that overall inflation declined 0.2%.  However, the Core Rate (which strips out food and energy prices) increased 0.2%.  Since this month will replace last September’s reading of just 0.1%, the net impact to the year over year figure reflects an increase from +1.8% up to +1.9%.  This is just shy of the Fed’s previously stated goal of +2.0%, which is giving the market reason to be concerned about the Fed moving rates higher before year’s end.  However, the Fed primary bases their target off of the Personal Consumption Expenditures (PCE) report, which is currently running in the 1.3% range.

Bonds remain in a volatile position near the top of a sideways trading channel.  Given the current risks of bonds drifting down towards the bottom of the channel, we will maintain our locking bias.