Midterm Mayhem

Midterm elections are giving bond investors something to look forward to.

According to Michael Wilson, a top-rated strategist with Morgan Stanley who correctly predicted this year’s stock market fall, a Republican victory will send bond yields lower and stock prices higher.

Polls are currently suggesting that Republicans will win at least one chamber of Congress, with some suggesting a strong Red Wave will provide victories in both the House and the Senate. If Wilson’s prediction does come true, this would be welcomed news for mortgage rates which have been battered since early 2022. Although the 10 Year Treasury Yield doesn’t directly impact mortgage rates, the two will generally trend in the same direction. 

News of tech layoffs continue to dominate headlines, with Meta now preparing to notify employees of a large-scale reduction in their labor force. This follows last week’s major cut to the head count at Twitter. With both Apple and Amazon freezing new hires, we could start to see a rise in unemployment claims. As the Fed has stated, the labor market is too strong and needs to slow down for the Fed to consider a “Pivot.”

With Weekly Unemployment Claims averaging in the 220k range, we clearly are not yet near the drop in the labor market the Fed is looking for. We would need to see weekly claims rise to somewhere in the 325k range to make a meaningful increase to the unemployment rate.

Mortgage bonds staged a weak attempt to challenge the 25-day moving average in early morning trading, which has proven to be a formidable ceiling for many months. As expected, they were denied once more and have since retreated. Investors could be waiting on this Thursday’s Consumer Price Index (CPI) report before making significant bets on mortgage bonds.

If we see the report show inflation is moderating to acceptable levels, we could see a strong rally and mortgage rates fall. However, the past few months’ reports have shown inflation well above the market’s expectations. Betting on lower inflation is risky.

We will maintain our locking bias.