After hitting a key ceiling of resistance yesterday, mortgage bonds dropped lower. The drop continued this morning and still has some room to fall. This drop in pricing, which pushes mortgage rates higher, was anticipated in yesterday’s market update. We were at the top of a trading channel which makes a move lower likely. We are still within the upward trading channel, so this move is not yet overly concerning. With this being the week of November’s job growth being reported, volatility will certainly be higher. Many bond investors will be taking their chips off the table before the reports start coming in order to avoid potential market losses if the reports are stronger than expected. We will receive the initial reading tomorrow when ADP releases their estimates, followed by Friday’s more significant report to be released by the Bureau of Labor Statistics.
Federal Reserve Vice Chair, Stanley Fisher, spooked the markets this morning by sparking fear of inflation and a Fed Funds rate hike. He said that there is a significant chance of wage pressured inflation to pick up and that continued labor market improvement and just “some signs” that inflation is beginning to stir would be enough for the U.S. Central Bank to move short term interest rates higher. He went on to say that once lift off occurred, meaning that they start to hike rates, that rates will continue to move higher. Now with knowing Mr. Fisher’s past predictions on inflation and his overly “hawkish” views for the past four years, his comments must be taken with a grain of salt. He has completely missed the mark in his prior forecasts. However, we will be looking for any signs of wage based inflation in Friday’s BLS Jobs Report.
With the stock market climbing today, mortgage bonds will likely continue to be pressured lower. We will maintain our locking bias as a result. Further, with volatility likely increasing as we move into the reports on the health of the job market, we feel there is more risk in floating. Unless other factors show the potential to move the bond market higher, we will maintain our locking bias through the jobs reports on Friday morning.