The Trade War Heats Up Again

Mortgage bonds remain in Groundhogs Day, unable to break above the critical ceiling of resistance that is preventing mortgage interest rates from setting new 16-month highs.  Without a catalyst to make a break higher, bond prices will eventually get tired of the fight and head lower.  Since significant drops in the stock market haven’t been enough to make this happen, the fear is that the next time we get positive news on the trade battle between the U.S. and China, stock prices will head higher and mortgage bonds will suffer even more.  At this point, that is a very real possibility.

President Trump made good on his promise to increase tariffs on $200 billion worth of goods out of China, taking the tariff from the current 10% up to 25%.  This move was made to intensify the pressure on China to agree to the U.S. trade terms and avoid an all-out trade war.  However, in the meantime, the U.S. companies that purchase goods out of China will be the losers in this round of the fight.  The longer this drags out, the more our GDP for 2019 will suffer.

This morning’s Consumer Price Index (CPI) report, which measures inflation on a consumer level, rose from an annual rate of growth of 1.9% up to 2%.  The Core Rate, which strips out food and energy prices, increased from 2.0% to 2.1%.  Although the increase was expected, it’s important to note that both numbers are above the Fed’s target rate of 2%.

Given the weakness in the bond market, we will maintain a locking bias.