Mortgage Market Update

We had a lot of news and data to digest in the market last week, once again showing the volatility and stressing the importance of following the right securities (MBS) to provide guidance to your clients.  Mortgage bonds managed to only lose 15 basis points for the week.  Let’s jump right in.

What a week we had last week as we started with a huge negative report (PCE), with overall inflation at its highest level since the early ’80s.  Then the Fed decided to keep the Fed Funds Rate unchanged (no surprise there).  Also helping beat down bonds a little was the fact the European Central Bank left their rates unchanged, despite their own recessionary pressures, as did the Bank of England.  Of course, the stock rally didn’t help either.

But the Fed’s policy statement left some questions overall, not to mention there was only 1 vote for a rate hike as opposed to 2 last meeting.  Wednesday dropped like a hammer (pattern I mean), and bonds looked like they could actually turn the tide, which they did.

What got them started?  One could say the continued drop in oil prices, helping fuel the belief that inflation will actually moderate down the road.  But there was a Treasury Auction that took place Wednesday afternoon that had very good foreign participation, breathing new life into mortgage bonds.

Then came the Initial Jobless Claims which was considerably higher than expectations, fueling recessionary fears.  Wal-mart’s miss on earnings added another log to that fire.  As stocks lost their muscle, money flowed into bonds giving them a fairly nice boost on the day.  Another good Treasury Auction occurred and bonds continued their rally.  The rally could only be momentarily stopped by Fannie Mae’s earnings (a huge loss as was Freddie Mac’s), but the rally resumed through Friday.

So what is in store for this week?

Expect bonds to be tested this week as data on inflation flows and they are up against their resistance.  We will also see recessionary data and if the “stimulus check” effect has worn off or if we are still seeing better than expected sales.  Bonds will need some favorable news if they are going to break the long term downtrend, even if they are going to get through their current resistance.  Here is the breakdown of scheduled data:

• Monday:  No data
• Tuesday:  Balance of Trade (8:30)
• Wednesday:  Retail Sales (8:30), Crude Inventories (10:30)
• Thursday:  Initial Jobless Claims (8:30), CPI (8:30)
• Friday:  Empire State Index (8:15), Capacity Utilization (9:15), Industrial Production (9:15), Consumer Sentiment (10:00)

Looking at the charts and we can see an interesting picture of hope, couple with uncertainty.  In the near term, bonds recently rally has shown strength, possibly even enough to break their 25-day moving average, but the longer term picture still shows a downtrend and bonds will need some “solid reason” to break this trend.  Stochastic indications are also positive for the near term.

Will bonds be able to break through their current resistance layer (25-day MA)?  Will bonds be able to break through their long term downtrend?  Or will they break down once again and remain locked into bringing higher mortgage rates going forward?

These are good questions which will hopefully be revealed this week as the battle between recessionary and inflationary fears heats up with fresh data.  My hope is that bonds will have a winning week, but the bigger picture says that is not likely, as does my gut.  I am holding my locking stance until the 25-day has been broken as I said in my daily mortgage market blog, Florida Mortgage Daily.