Locking bias

The stock market is again taking direction from the Chinese markets. China’s government has decided that it will not continue its stock purchases as a tool to help support their stock market. Rather, they plan to go after those they believe to be causing the recent volatility as a solution to gain market stability. News of this caused The Shanghai Composite Index to fall, which has spilled over to the US markets this morning. At this point, it appears that August will be the worst month for the US stock market in four years. However, many economists feel that the volatility in our financial markets is a healthy reset and one that is long overdue. Our economy will soon need to learn how to operate in an increasing interest rate environment, which it has not faced since 2006. That has many investors worried. Combined with global economic concerns and you have a recipe for continued volatility.

There is much debate about whether the Federal Reserve will raise short term interest rates at their next FOMC meeting, which happens on September 17^th. What seemed to be a sure thing to many has become a mystery in the wake of a global stock market drop. Many believe that it is too soon to raise rates because our financial markets lack the strength to withstand the additional headwind such a move is certain to create. On the other hand, many believe that waiting for inflation to hit 2% will be too late to begin the process of raising rates. By the time inflation is at that level, the velocity of increase will be too strong to slow down with small, incremental rate hikes. This week’s Bureau of Labor Statistics Jobs Report will weigh in heavily to the Fed’s decision. A strong employment reading for the month of August could give reason for the Fed to act in September.

Mortgage bonds remain trapped in the same sideways channel. Unless bonds show the strength to make a break higher, we will maintain our locking bias.