Trade tensions waned following Monday’s threat made by President Trump against China. The markets seem to react to news quickly and then forget shortly after. As a result of this phenomenon, stocks across the globe have rebounded and replenished some of their losses accumulated over the past couple of days.
Mortgage bonds lost their battle over the 50 day moving average this morning, which is not a good sign for the near term direction of interest rates. With the 25 DMA just below current levels, it will be important for bonds to remain above this key trend line. If they fall, which I anticipate they will, there will be plenty of room for bonds to fall.
Federal Reserve Chairman Jerome Powell restated his case for continuing to raise interest rates to help keep the US economy on a growth path. Within his comments he referenced the strong labor market, rising inflation and strong support from his colleges within the central bank. This means we could see an additional two rate hikes before the end of 2018, which is one higher than the market has been anticipating. The key will be to watch the spread between the two and ten year treasury markets. If longer term rates don’t rise, the Fed will likely be forced to hold off on the additional hike, as that could narrow the margin between the two rates as an indication of an imminent recession.