After starting the day off like rock stars yesterday, the stock market closed with the DOW suffering another 200+ point loss. In spite of the weakness in the stock market, mortgage bonds also had a rough day yesterday. So far today, stocks have skyrocketed higher and mortgage bonds have continued their downward spiral. Once again, China is driving the direction of our markets. After announcing they will pump 140 Billion Yuan into their economy, China is adding strength to the US markets. This is helping to drive mortgage rates higher as investors pull cash from the bond market to invest into the stock market. Many are viewing this as an opportunity to purchase stocks at a discount. The low prices are inspiring many to jump into stocks to take advantage of the opportunities.
In economic news, Durable Goods Orders for July were reported to be up 2.0%. This was much stronger than the -0.4% anticipated. When you exclude transportation purchases, the report is +0.6%, which is also stronger than the +.04% expected. Overall, this was a strong report. Especially when you consider that there were upward revisions to last month’s report as well. A stronger Durable Goods figure reflects an increase in the consumers’ willingness to make large purchases. This also aligns with a much stronger Consumer Confidence report that was released yesterday. We will have to see if the strength in the consumers’ mindsets continues into next month after the significant drop in the stock market. That loss in investment portfolios could cause many who live off their investment portfolios to slow down their rate of spending.
There is still a very weak sentiment in the bond market. Since attempting to break above the 200 day moving average, mortgage bonds have lost more than 100 basis points in pricing. In theory that means that it will cost an extra 1% of a loan amount to achieve the same interest rate today vs. the pricing on Monday. In reality, we were never given the full benefit of where bonds peaked on Monday. Therefore, the actual impact has been as significant. However, that is how mortgage bond pricing impacts mortgage rate pricing. Unless bonds are able to find strength, the safe play will be to maintain a locking bias.