Mortgage Market Update

This week is a week to be thankful as we are going to have a shortened trading week due to Thanksgiving.  My original plan was to write this while flying over the Amazon, but couldn’t exactly figure out how to use piranha to describe the markets and chose to sleep instead (it was an overnight flight after all).  Needless to say, with 2 hours sleep on the plane and 2 hours more at home, not to mention the pot of coffee, here goes this week’s update.

Last week was far from the mortgage market collapse that could have happened, instead only having one real day of volatility and a week that ended with a slight improvement in mortgage rates.  Yet, there should have been another rally off the news that came out last week and based on the data that was flowing, which favored mortgage backed securities.

Focusing on the bigger reports and news, we saw inflationary fears turning into deflationary fears, with many concerned about what deflation would do to our economy.  More data signaling the continued struggles for life in our economy was also revealed as CPI brought deflation to the forefront, the FOMC Minutes revealed the Fed’s real concerns, and the Philly Fed Index just drove another nail into the economic coffin.  All of this would typically light a fire under mortgage bonds, driving them higher and mortgage rates lower, but bonds remained fairly flat.

Why?

Uncertainty is one of the biggest reasons.  Commercial Mortgage Backed Securities (CMBS) were having some problems this week and that creates some concerns over on the residential side as well.  Those concerns helped keep mortgage bonds in check while Treasuries rallied, once again highlighting the need to follow MBS and not rely on the 10-year T-Note.

The other reason that likely prevented mortgage bonds from rallying is good ole technical indicators.  While bonds have been moving back and forth along their 200-day moving average, even ending the week above it, they are still unable to break through the downward trend line which marks the trading range they have been in for quite some time now.  So, those piranhas may be lurking in the waters after all.

As we move into this Thanksgiving week, we have to use caution for many reasons.  For starters, mortgage backed securities remain solidly below the downward trend line.  Another reason is that  stochastic indications are moving into the overbought zone again.  Adding to those reasons is the fact that shortened trading weeks tend to be very volatile.  And finally, we have one of the biggest data reports coming out this week, the Personal Consumption Expenditures Index (PCE).  Here is the data schedule for the week…

• Monday:  Existing Home Sales (10:00)
• Tuesday:  GDP (8:30), Chain Deflator (8:30), Consumer Confidence (10:00)
• Wednesday:  PCE and Core PCE (8:30), Personal Spending (8:30), Personal Income (8:30), Initial Jobless Claims (8:30), Durable Goods Orders (8:30), Chicago PMI (9:45), New Home Sales (10:00)
• Thursday:  HAPPY THANKSGIVING!!!
• Friday:  No data

As you can see, most of the data comes on Wednesday and that could spell a major turning point, for better or worse.  As mortgage bonds remain held down by the downward trend line, even as data comes in very favorable, one can only wonder exactly what lies ahead.

Looking at the technical indications, the picture does not look good to say the least.  Data usually overtakes technical factors, allowing breakouts to occur, but so far we have been seeing data fail to do so.  This week will likely see the final test of that overhead resistance, especially with the PCE coming out Wednesday.  If mortgage bonds fail yet again, those piranhas may swarm in and eat mortgage bonds alive.  If they manage to break out above, mortgage bonds will breathe new life and lower mortgage rates will be in the future.  Will the piranhas rule the week?