Locking Bias

In the announcement at the conclusion of the Fed meeting yesterday, the Fed left rates unchanged and made a very noncommittal statement.  On one side, they softened their language on inflation, removing their “Confident” stance that inflation would move up to their 2% target rate in the near term.  On the other hand, however, they made very strong statements regarding the labor market.  In the end, they gave investors little reason to believe that they have backed off of their “four rate hikes in 2016” stance that they announced in the December meeting.  As a result, stocks moved sharply lower and mortgage bonds move a little higher after the release. 

Durable Goods for the month of December were released this morning, showing a -5.1% reading.  This was much lower than the +0.2% anticipated and also lower than last month’s 0.0%.  Durable Goods excluding transportation was reported to be -1.2%, also lower than estimates of 0.0% and last month’s -0.1%.  Year over year, Durable Goods are now at -0.6% and Excluding Transportation, they are at -3.2%.  This weak report comes one day ahead of tomorrow’s highly anticipated GDP reading, where we will likely see evidence that growth in the US economy has dropped to below 1%.  Both of these are very critical indications of the strength of the US economy overall.  These are both signs that the consumer, which is truly the backbone of the US economy, is not spending money at a rate that supports higher interest rates.  The last time unemployment was at these low levels, consumer spending was heavily fueled by cash out mortgage refinancing to purchase boats and other large ticket items.  That is not the consumer of the current day, which is something the Fed will need to consider in their future plans to tighten. 

Mortgage bonds are now at the top of a trading range attempting to make a break out.  This is a critical moment for mortgage bonds.  Because breakouts are the exception and not the rule, we must assume that bonds will be pushed lower.  I feel it is likely bonds will drop lower in the short term to test the bottom of the current trading channel before making a run higher.  Therefore, for loans needing to close in the near term, a locking bias is the safe play.