Mortgage Market Update

If the mortgage market collapses this week, just “Blame it on Rio,” as that is where this week’s market update is coming to you from.  After all, with the volatility of last week’s shortened trading week, and the volatility sure to come next week as we give thanks, we need to put blame somewhere.

Looking back at the last week, we see a fairly eerily similarity to the prior week.  That is, when the data flowed and pointed towards nothing but a poor economy, favoring mortgage backed securities and lower mortgage rates, they failed to make significant gains and remain trapped in their trading range.  Mortgage rates ultimately made no changes by week’s end despite the “good news.”

The week was plagued with poor earnings announcements and even started with Circuit City’s bankruptcy.  After Circuit City’s news, it seemed that everyday had another retailer releasing their problems to the multitudes, even Wal-Mart.  And who can forget the worst Initial Jobless Claims number since 2001?

If you remember, the prior week saw a large amount of data, culminating in a dismal jobs report which gave mortgage bonds their best chance of breaking free of their trading range, only they failed.  This last week saw less data and ended with yet another breakout chance with a dismal Retail Sales report.  Again, they failed.  The pattern forming in the charts is similar to what we saw and September, and that does not portray a good picture for the future of mortgage rates.

Just how bad does it look?  Let’s take a closer look at the week ahead and what the charts show.

Unlike last week, we will see plenty of data being released this week.  Now that traders are becoming fairly “numb”, data and technicals are becoming more in control again, as we have seen.  This week’s data will be more inflation focused, so we can see the “other side” this week.  The major players to watch for are the CPI and Philly Fed, and we will see the “Fed Unplugged” released as well.  Here is this week’s scheduled releases…

• Monday:  Empire State Index (8:30), Capacity utilization (9:15), Industrial Production (9:15)
• Tuesday:  Producer Price Index (PPI – 8:30)
• Wednesday:  Consumer Price Index (CPI – 8:30), Housing Starts (8:30), Building Permits (8:30), FOMC Minutes (2:00)
• Thursday:  Initial Jobless Claims (8:30), Philadelphia Fed Index (10:00), LEI (10:00)
• Friday:  Take a break, no data.

As you can see, mortgage bonds may get some opportunity to try again.  The big question is that surrounding inflation as we have not seen related data in a while and we will see the PPI and CPI this week.  You can expect more recessionary data as well.  The bottom line is that this week will likely be bonds’ last chance to break free to lower mortgage rates.

Switching over to the charts, as I mentioned earlier, we see a pattern that looks almost exactly like we saw in September when mortgage rates held for a time, followed by rising rates, in what was the beginning of the current trend.  Stochastic indications remain on the overbought side and we saw yet another lower peak form in pricing.  The good news is that mortgage bonds continue to trade along their 200-day moving average and if they can hold above this major support, hope may yet remain.

Another bit of potential good news is that the current trading sideways trading range is made up of descending tops and rising bottoms.  That means the trading range is getting smaller and smaller each day and a breakout one way or the other must occur at some point.  With the data flowing this week, that allows another big opportunity for that breakout to occur, for better or worse. 

So, the charts show odds favoring higher mortgage rates, but data should favor lower mortgage rates.  As the week unfolds, be ready for a move either direction.  Based on recent trading history, even with favorable data, mortgage backed securities may not be able to break the bonds of this trading range and will again be unable to drive mortgage rates lower.  At least it should be a fun ride.