Mortgage bonds are lower so far this morning. Even more concerning is the pattern formation playing out on the bond charts. It looks eerily similar to how the markets looked in early July when they hit the same highs bonds hit a few days ago. After being unable to break above the ceiling of resistance, bonds spend a few days battling the level before suffering significant losses over the following couple of weeks. Since history is our greatest predictor of the past, we must be concerned with how similar this patters appears to be playing out in current trading. If history repeats itself, we can anticipate bonds breaking down and interest rates driving higher over the next couple of weeks. Let’s hope this doesn’t happen. But it must be something to watch out for.
The Personal Consumptions Expenditures (PCE) report was released this morning. The Core rate, which strips out food and energy prices, was up 0.2% month over month. The year-over-year rate moved higher from 1.6% up to 1.7%, which is the highest level we have seen in two years. Although PCE is still below the Fed’s target rate of 2.0%, we are now 25% closer to this target than we were yesterday. In the Fed’s recent predictions, they believe we will hit the 2% level by late 2017 or early 2018. However, they have a terrible track record at predicting inflation and we feel this benchmark could be reached much sooner than expected. That would drive mortgage interest rates higher in the near to long term.
For the first time in years, we are truly becoming more concerned about higher longer term interest rates. Although interest rates will still be amazing, we could see changes in the coming weeks or months. In the short term, we will maintain a locking bias.