The bond market appears to be forming a downward channel in anticipation of the Fed remaining stubborn to raise interest rates. Bond investors are growing weary of the market and not willing to put more on the line until they know which direction the Fed is going to take. For now, bonds have been pressured down to their 100 day moving average which appears to be holding at the moment. The 100 and 50 day moving averages have provided strong support in the past and hopefully will prevent bonds from making a break lower, for today at least.
Retail Sales for the month of August were reported to be +0.2%. This was lower than the +0.3% gain the market anticipated. Last month’s original report of +0.6% was revised higher to +0.7%. Retail Sales less autos and gas was reported to be +0.3%, which was also lower than the +0.4% expected. As mentioned in yesterday’s update, there are many highly admired investors who are now selling stocks that are tied to Consumer Spending. A lower Retail Sales report supports their opinion that the consumer driven businesses will be slowing. Since consumer spending is the heartbeat of the U.S. economy, as this segment slows it will create a ripple effect throughout all aspects of our economy.
Tomorrow’s Consumer Price Index report has a high probability of hurting mortgage bond pricing. A strong reading on inflation will clearly send the bond market into panic. However, even if consumer inflation is mild, the bond market could view that as a sign the Fed will hold off on raising interest rates until inflation numbers are higher. Bond investors would rather the Fed make a move now to fight off future inflation before it hits. Therefore, a delay in raising rates would be viewed as a strong likelihood of higher inflation in the near future. In light of this, we will maintain our locking bias.