28 Mar Strong Locking Bias
The most significant potential market moving event of the day is the developments along the border of Russia and the Ukraine, where Russia is said to have a significant troop buildup. All signs point to Russia planning to move into Ukraine if they get the go ahead from Russian President Vladimir Putin. This is a scary situation and has the potential to escalate further, which would have implications to our US economy. With how connected the major powers are economically, one way Russia can harm us is to dump their US bond holdings. This would be a retaliatory move to counter US sanctions against Russia, and could immediately drive interest rates higher here in the US. We will keep a close eye as this develops and let you know how it may impact mortgage rates as events transpire.
We had personal income and spending released this morning, showing an increase of .3%. This is close to market expectations, so the announcement had little impact. More importantly, we had PCE (Personal Consumption Expenditure), which is the Fed’s favorite reading on inflation, also released. It showed that inflation still remains nearly non-existent. It was only up .1% month over month, with a year-over-year increase of only 1.1%. The is very low and far beneath the Fed’s target of 2 ½%. At this point in the Fed’s bond buying program we would expect to see more pricing power in the market. This brings up the fear of what will happened when the Fed stops their bond buying program all together. That is a deflationary move that could drive this figure down even lower. Two of the most dangerous economic patterns are inflation and deflation. There is a delicate balance between the two that is in the + 2% – 3% range. This is where the majority benefit and only a small percentage are harmed in our economy.
Mortgage bonds are struggling this morning, and are sitting right on the 200 day moving average. With the weakness in the bond market, and with stocks rallying, it is possible that bonds will break beneath their support. We are going to have a locking bias today. There is great volatility and risk in the markets right now. It is not a great day to take a chance.