By now you have heard that the government has basically taken over Fannie Mae and Freddie Mac, something I had mentioned would happen. As with virtually all government takeovers, the official word hit the airwaves while “most” Americans were in church (Sunday Morning). More on this and its effects later.
Looking to the last week, mortgage bonds have been continuing their rally, which started back on August 14th with little “interruption”. Avoiding the stochastic indications, the charts pointed to mortgage bonds performing well and us heading for lower mortgage rates. Friday, despite the expected favorable news, bonds got a bit of a correction and dropped briefly.
As the news flowed last week, there were signals of a strengthening economy in the ISM Index, and the ISM Services Index. But there were also concerns about the economy with increased productivity and the wording of the Beige Book. Even Friday’s plethora of jobs related data pointed to economic concerns with the only semi concerning report being increased Hourly Earnings. But with less jobs, who really cares if those working harder make slightly more?
So, overall, the week did better than expected with a small correction Tuesday, followed by the continuation of the rally, though Friday’s correction was a little off in its timing. The end result for the week was mortgage bonds breaking down their 200-day moving average, ending the week up 56bp and sending mortgage rates down slightly.
As is typical, you just have to through the charts out when breaking news, such as the Fannie Mae/Freddie Mac takeover, I mean conservatorship, occurs, The market has already opened and mortgage backed securities are through the roof, maybe even pushing higher still as the day plays out.
Why does the government always broadcast this type of news on Sunday morning, especially as the NFL season gets underway? You will have to read my piece on this governmental move later when I get a chance to write it and post it over at the Florida Mortgage Report.
Moving beyond today’s headlines, we look at this week’s data and how it may play out as the “dust settles” from today’s opening. We can expect the wheels put in motion today to play out through at least tomorrow as no data will hit the airwaves until Wednesday. That means increased volatility for the next few days at least since any move of this magnitude will have a pullback. As the week draws to an end, inflationary news will be hitting the airwaves along with the big report of the week, Retail Sales.
- Monday: FNMA/FHLMC news plays out, No data
- Tuesday: No data
- Wednesday: Crude Inventories (10:30)
- Thursday: Initial Jobless Claims (8:30), Balance of Trade (8:30)
- Friday: Retail Sales (8:30), PPI (8:30), Consumer Sentiment (10:00)
As the news gets digested and things normalize, charts will come back into play and you can bet that their will be a “correction”. Oh, and for those of you foolishly watching the Treasuries for rate guidance, they are polar opposites today. Stochastic indications obviously remain overbought and the charts point towards lower rates for the long term, meaning Friday’s news will likely get bonds back into rally mode if the correction has taken place before then.
I can’t help but think this isn’t good news. Rally it may be, but heaping another pile of debt on the public, and the fact that Fannie & Freddie will now be switfly overtaken with bureaucratic inertia means that the mortgage mess is going to get even worse. Am I too pessimistic here?
You have good reason to be pessimistic, Ling. Only time will tell for sure, but history shows that when the government moves like this, it is never good in the long run, only settles short term “fears.”