22 May Prudent to Lock
Mortgage bonds closed the day yesterday up 2 basis points, while the stock market moved higher to close within striking distance of all-time highs. This provides further evidence of the differences in logic between the two markets. While the bond market sees risks and struggle in the economy, the stock market appears to be blindly moving forward. As we have learned from the past, when a market appears to be functioning without reason, watch out. We all remember the term “Irrational Exuberance.” I feel it is border-line reaching this point.
Initial Jobless claims for the week ending 5/17/2014 were reported at 326,000. This was above estimates of 310,000, and well above the prior week’s upwardly revised 298,000. This does not bode well for the typical hiring season as we move into the warm months of summer. This adds further fear to the concern of another low GDP figure in the 2nd quarter of 2014. Last quarter’s GDP was a measly 0.1%. A recession is defined as two consecutive quarters of negative GDP. We were nearly negative last quarter, and now run the risk of being negative in the 2ndquarter. The low GDP figures are the primary driving force behind lower interest rates the past couple months. However, again, the stock market seems to be ignoring the data.
Yesterday’s Fed Meeting Minutes had no surprises at all. Therefore, the reaction in the markets was muted. The minutes confirmed that the Asset Purchase Program (QE3) will continue to wind down, and that short-term rates will remain near zero for a long time.
Mortgage bonds are facing their sixth day trying to break above resistance. They are currently at the bottom of a trading channel. Therefore, bonds will likely make a break above or below today or very soon. When a break happens, it may come with an exaggerated response. Until we see the direction of bonds, we will suggest a short-term locking bias.