Locking bias

Mortgage bonds are falling hard once more today as the markets digest strong economic news and the reality of a likely December interest rate hike just around the corner.  The blockbuster of the day came from Initial Jobless Claims, which measure filings for first time unemployment benefits.  They reportedly fell 19,000 from the week prior to 235,000.  This was 22,000 below expectations and was the best figure since 1973!  Adding to the strength of the job market was Continued claims, which fell by 66,000 to the lowest number in 16 years!  Since this happens to be the week used in computing job growth for the month of November, this points to a strong report when the results are announced on the first Friday of December. 

The Consumer Price Index (CPI), which measures inflation on a consumer level, came in a bit timid.  The headline figure showed a monthly increase of 0.4%, pushing the year over year figure higher from 1.5% to 1.6%.  However, the more important Core reading, which strips out food and energy prices, showed a monthly increase of only 0.1%, which was below expectations of 0.2%.  Thus, the year over year Core rate moved from 2.2% down to 2.1%.  However, this was the twelfth month in a row that the Core CPI number was greater than the Fed’s target of 2.0%.  With inflationary momentum seemingly picking up overall, we can anticipate a rate hike when the Fed meets in December. 

Bond prices continue to fall.  It seems that rates will get worse before they begin to improve.  Therefore, we will maintain our locking bias.