Mortgage bonds remained above support yesterday and were actually able to manage a mini rally in the later hours of trading. This morning, we received an update on the Consumer Price Index (CPI for the month of January, and it was hotter than expected. Headline CPI, which measures inflation on the consumer level, showed no change, however, the market was expecting a decrease of 0.1%. The Core Rate, which strips out food and energy, was up by 0.3%. Most importantly, year over year Core CPI increased from 2.1% up to 2.2%…. the highest level since June 2012. Most economists watch the Core Rate closely, so a higher reading was somewhat concerning to bond traders.
Corporate earnings in the last three months were the worst they have been since 2009. Overall, they declined 4% at the largest 500 public traded companies compared to a year ago. This drop has highly influenced the recent downward correction in the US stock market, which has helped drive mortgage interest rates lower. Given the timing of the Federal Reserve rate hike, it seems unfortunate to have the first rate hike in 9.5 years to coincide with declining earnings, inflation well below healthy target levels, and economies such as Japan and Sweden moving their benchmark interest rates into negative territory. Although not expected at this point, there is chatter that the Fed will consider reversing course at some point in the next year and a half. That would be a very negative signal and would speculate a recession around the corner.
With support so far holding beneath us, there is no need to immediately rush in to lock. However, we are trading in the middle of a sideways channel, which makes bonds susceptible to the “whipsaw effect” where prices can fall to support in a hurry. Since there is very little room to the upside, if you aren’t able to watch the markets closely, the safe play will be to lock.