10 Oct Rates Pressured Higher?
The newly formed downward trading channel in the bond market remains firmly in place this morning, pushing bond prices beneath their 50-day moving average. With the 25 DMA just beneath current levels, we need to hold here. Otherwise, we will see mortgage interest rates quickly take a step higher. Given the strength of the stock market today, chances of this support breaking are high. The stock market’s strength is being fueled by renewed optimism surrounding the trade war with China. With important trade meeting happening today, we should expect to see the optimism continue. This is not good news for the near-term direction of mortgage interest rates.
This morning’s Consumer Price Index report showed that after stripping out the volatile food and energy prices, the annual pace of Core inflation remained steady at 2.4%. This matches the highest level in 11 years and is not good news for bond holders. Since inflation is the arch enemy of the bond market, it is the most important factor that influences mortgage interest rates. Higher inflation will lead to higher interest rates.
There is hope of a “mini deal” being negotiated with China today. I believe that now is an opportune time for China to negotiate a deal with President Trump. As talks of impeachment heat up, I’m confident that President Trump will be needing some wins to help keep his base loyal. A trade deal would be great for the stock market, which seems to be how Trump measures economic success. This will not be good for mortgage interest rates, so we need to be on guard.
Given the continued weakness in the bond market, we will maintain our locking bias.