Mortgage Market Update

Do you ever wake up and wonder where you are and where are you going?  This morning’s update is coming to you from San Juan, PR, where I ended up last night in a last minute change of schedule.  As I woke up this morning, the news flashed on CNBC and it looks like the fear grenade will hit the markets again like last Monday; more on that later.

Last week held very little regarding data and that left technical factors and news, along with trader “mood swings”, in control.  Mortgage backed securities started to rally, primarily on the basis that PIMCO, the world’s largest bond fund company, began gobbling up mortgage backed securities.  Poor earnings from some big name companies also contributed to the push higher in bond prices.  Mortgage rates were looking good as the week got started to say the least.

Unfortunately, Monday’s spike higher was the final push as the trend weakened and my warnings became reality.  Once again, the fear grenade hit the markets and the mood surrounding mortgage bonds turned sour, especially Thursday and throughout Friday.  A worse than expected Initial Jobless Claims couldn’t even prevent the fall of mortgage bonds, and thus mortgage rates ended the week basically right where they started, crashing through multiple support layers as quickly as they broke through the same when they were resistance.

As we move into this week, lack of data is not a factor as we will have some major players and that may get the markets following reality a bit, though not likely on Monday as the “fear grenade” has already been thrown.  As the week starts, we have a continuation of the global stock markets being “blown up”, meaning they are setting new records for downward movements.  The impact on mortgage rates remains to be seen, but we can expect a resumption of the downtrend in all likelihood as the week progresses.

As far as data goes, as I touched on, we have some big ones coming up.  By now, you have likely heard that this Wednesday is the FOMC Meeting’s decision on the Fed Funds Rate.  It is virtually guaranteed that the Feds will cut the rate by 0.50% (50 basis points) to 1.00%, where Greenspan left it years ago.  Other major players include GDP and PCE, but here is the full rundown…

• Monday:  New Home Sales (10:00)
• Tuesday:  Consumer Confidence (10:00)
• Wednesday:  Durable Goods Orders (8:30), Crude Inventories (10:30), FOMC Meeting (2:15)
• Thursday:  Initial Jobless Claims (8:30), GDP (8:30), Chain Deflator (8:30)
• Friday:  Personal Consumption Expenditures (PCE – 8:30), Employment Cost Index (ECI – 8:30), Personal Income (8:30), Personal Spending (8:30), Chicago PMI (9:45), Consumer Sentiment (10:00)

As you can see, the week will start off a little slow in relation to data, so news and technical indications will control the markets, that is unless emotions continue to rule as they have.  As far as technicals go, watch out as a downtrend is now firmly in place as bonds failed to make a higher peak this last run.  Stochastic indications also point to a resumption of the downtrend, so odds favor locking to protect your clients as mortgage rates will likely push higher by week’s end, if not sooner.

One thing to remember is that the Fed’s decision to cut the Fed Funds Rate typically send mortgage bonds lower and mortgage rates higher, contrary to the popular held belief (many media still fail to grasp that fact).  That alone will place pressure on mortgage bonds and if data cannot provide strength, bonds will continue to falter for sure.  We cannot rely on the typical stocks versus bonds comparison as they have both moved the same direction numerous times in recent history, such as they did on Friday.  Once again, referring back to the charts, odds favor higher mortgage rates ahead.