Greetings from Sao Paulo, Brazil and I hope you are having a wonderful Labor Day. Speaking of Labor Day, for those of you who don’t know, the markets are closed today.
Last week was a fun ride, that is until Friday. Mortgage backed securities climbed the first four days as stocks fell on news favoring a weak economy versus inflationary expectations. Friday, that all changed when the PCE report was fully digested and showed continued inflationary pressures.
The housing front didn’t receive any “good news” in their numbers, but the underlying data, namely recent data, does show some improvement and the potential to see housing begin its recovery. Consumer Confidence was also improved, but that did not deter mortgage bonds. With no “surprises” in the FOMC Minutes, mortgage bonds were able to continue in rally mode. And even as GDP hit the airwaves, nothing seemed like it could stop mortgage bonds from advancing, bring mortgage rates lower.
Then came the PCE data, particularly the core data (minus food and energy). With inflation rising at the core level, even decreasing oil prices couldn’t stop bonds from losing ground, and rightfully so. We did need a correction as the stochastic indications showed, and that may be all this move lower turns out to be. Only time can tell with absolute certainty, but there are some good things to be seen and this week will add certainty to mortgage bonds’ direction.
As I mentioned, the bond market is closed for Labor Day, so rest easy, but be ready for tomorrow as the data begins to flow. With this week being “Jobs Week”, it will definitely be a volatile one, especially with a shortened trading week. Here are the scheduled data releases:
- Tuesday: ISM Index (10:00)
- Wednesday: ADP Employment Report (8:15), Crude Inventories (10:30), Beige Book (2:00)
- Thursday: Initial Jobless Claims (8:30), Productivity (8:30), ISM Services Index (10:00)
- Friday: Non-farm Payrolls (8:30), Unemployment Rate (8:30), Average Work Week (8:30), Hourly Earnings (8:30)
As you can see, mortgage backed securities will start the week off with a big report and will end with the “Jobs Jamboree”. That should keep the whole week full of action and we can expect some intra-day re-prices to happen this week as well.
As for the technical side of things, stochastic indications still show bonds to be overbought and in need of a further correction. With bonds hovering around their 100-day moving average, this level will likely keep bonds in their corrective mode for now. We do appear to have broken the long term downtrend finally and the charts point to lower mortgage rates for the future. Do not get too comfortable with that thought because this week’s data could still break the back of mortgage bonds.
I feel bonds will likely have a down day on Tuesday, with a resumption of the rally occurring later in the week, so long as data comes in accordingly. The big test for mortgage bonds will be Friday, but indications at the moment are that the report will favor bonds.
Robert – I am a real estate broker in Hawaii and it is getting harder to find good loan programs for the buyers in the market. When do you think the lenders will start coming out with better programs? Do you see a change in the near future?
Love your posts by the way.
I’m getting the same feeling, that housing could now be on its way to a sustained recovery. Could take time, but the general trend indicates a recovery.
Great post, Robert. With the storm damage less than expected, oil is down $7 this morning. It should be an interesting week.
Great post as always. I look forward to monday (or Tuesday) this week. last week turned out to be good and we can only hope that we are on our way back up. it is not going to be over night of course but we can see a change in the weather.
Jeff – Glad you are enjoying the posts. As for lenders coming out with better programs, it will take some time. They just got their butts smacked and still are feeling the pain. After the pain subsides, you can expect them to let their pants down again.
Ling – Glad to see you chiming in regularly. Housing is local, but I can see the prices stabilizing more and more in South Florida (where I am at) and I expect the same to be occurring elsewhere. Some areas will still see drops, but I feel we are at the bottom for prices in a lot of areas, or at least close to it.
Peter – Thanks. Oil keeps coming down and now tomorrow (Friday) will be the big day, and test for bonds.
VA – This week has been good. Stochastics are looking ugly still, but the charts have not looked this good in a long time. The downtrend has been broken.