The markets are preparing for the Federal Reserve announcement which will be released Wednesday afternoon. Although the chances of a Fed rate hike are near zero, the markets will be listening intently to the message for any hint of indication when we can expect the next hike. Given the strong readings on the job market, combined with higher inflation reports, talk of a rate hike within the Fed’s statements could become front and center to the markets once more. With oil prices moving more than 33% higher in the past month, it’s no wonder inflation is moving higher. In addition, fears of a bear market for stocks is also waning, giving the Fed additional reason to begin prepping the markets.
Mortgage bonds bounced off of the 50% Fibonacci level and are now moving higher. However, with the 10 Year Treasury Note yield breaking above its 50 day moving average, there is still a great deal of risk to rising mortgage rates. If the 10 YTN yield does not come back below this critical level, it could easily move another 10 basis points higher hitting resistance at the 100 DMA. Much of the near term direction of mortgage rates will also depend upon the stock market. The stock market is currently pushing up against its 200 DMA. A break higher would be detrimental for mortgage rates. However, if stocks are unable to break this barrier, we could see rates receive some support.
Although bonds are higher so far this morning, they remain just beneath their 50 day moving average. Unless they are able to break above this level, the risk of floating is high. With that in mind, the safe play will be to maintain a locking bias.