We will maintain our locking bias

The highly anticipated Consumer Price Index (CPI) reading for the month of July was reported this morning, with the results showing continued tame levels of inflation.  It was announced that inflation on the consumer level grew at a rate of just +0.1%, which takes the Headline CPI year over year growth rate to just +0.2%.  Core CPI, which removes both food and energy costs, was also +0.1% for the month.  However, year over year Core CPI was reported to be unchanged at +1.8%.  Both figures were a bit below the market’s expectation.  However, the reaction in the bond market was muted.  Some are reading this as a possible sign the Fed won’t make a move to push rates higher in September, which some believe is a needed move in order to maintain low levels of inflation.

Mortgage bonds remain in the same sideways channel, trapped between the ceiling of the 100 & 200 day moving averages and held up by the floor of the 25 day moving average.  As time goes by, the range between the ceiling and the floor is tightening, which will eventually leave bonds forced to decide which way to make a break.  This is where predicting longer term trends will become difficult.  However, given the strength of the 200 day moving average, we must assume that the 200 DMA will provide formidable resistance.  Therefore, the best bet at this point in the market is to assume that we will not see significant improvements in mortgage interest rates in the near term.

Given the continued volatility, the safe play will be to maintain a locking bias.


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