Safe play is to lock

The big headline of the week will be the Bureau of Labor Statistics (BLS) Jobs Report that will be released on Friday.  Given the attention to employment strength by the Federal Reserve, this will be a highly watched report.  In addition to the headline number of new jobs created, Hourly Earnings and Hours Worked will be intensely scrutinized.  After the ECI Report last week showed wages growing at anemic levels, the bond market shot higher, pushing mortgage rates lower.  If we have more people working but wages aren’t moving higher, then the average person is not financially progressing in a way needed to sustain a growing economy.  When people are living paycheck to paycheck they may be able to survive but they don’t have the resources to spend beyond the minimum needed.  That is not a sign of a strong and vibrant economy.

Personal Consumption Expenditures (PCE) was reported this morning, showing only tepid signs of inflation.  Since this is the Fed’s favorite gauge of inflation, it is closely watched.  The Headline number rose by 0.2% in the month of June and only 0.3% on a year over year basis.  The more important Core PCE (which strips out food and energy), showed an increase of 0.1% in the month of June, and a 1.3% increase on a year over year basis.  Overall, inflation levels are still well below what the Fed would like to see.  When they raise short term interest rates, they will need to ensure that inflation doesn’t fall even further.  They are in a difficult situation at this point in the economic recovery.

Mortgage bonds are currently just beneath a triple layer ceiling of resistance.  This makes floating very risky.  The general rule is to lock when at the top of a channel and float when at the bottom.  Given the strength of the three ceilings, the safe play will be to have a locking bias.