Mortgage bonds came out of the gates fighting this morning, fueled by the August Durable Goods Report that was reported to be -2.0%. Although this was in line with the market’s expectations, it was a sobering report and well off the past two month’s reading which were both positive. Durable Goods excluding transportation were unchanged at 0.0%. This month’s reading puts year over year Durable Goods at -2.3%, with the figure less transportation at -3.9%. As we mentioned in one of last week’s updates, it was reported that Warren Buffet is now heavily selling stocks that are tied to consumer purchases, which Durable Goods is greatly made up of. We can assume that Mr. Buffet believes the consumer will slow their spending, which would not be a good sign for the US stock market. However, that would help improve bonds and mortgage interest rates.
Now is a great time to take a deeper look at the US stock market. Over the past several months we have had many stock experts warn of a more significant drop in the market. For one, David Pepper warned about stock market weakness and PE Ratios dropping. With earnings not anticipated to make significant gains, the only alternative to achieve a lower PE ratio is for prices to move lower. Should this happen, that would be a great sign for the bond market and would help pressure mortgage interest rates lower. The next few months could be interesting. We will have to wait and see what happens.
Bonds are attempting to make a break above their 200 day moving average. It seems like the desire to make this move is stronger than it has been in recent failed attempts. However, we must still remember that breakouts are the exception and not the rule. It would be like gambling to float right now. Roughly 80% or more of the attempts to make a breakout fail, pushing bond prices lower. Therefore, the safe play will be to lock. If you choose to float, watch the markets closely and be ready to lock if the markets begin to show weakness.