Just got back from Brasil again this week, causing a delay in this week’s report.  I think I am going to move them to Sunday’s instead as it seems I am always in some hotel room somewhere in the world that day, so why not, right?  Anyhow, enough with the “changes” in this update, let’s look at the “changes” in the future of mortgage rates.

When it comes to roller-coasters, the more thrills, the more fun they are.  Most roller-coasters have a major flaw…they only last for a few minutes at most.  When it comes to mortgage backed securities, we have been on a wild roller-coaster ride for just over one month, with numerous “drops”, a few twists, and several inclines as well.  In fact, we are on yet another incline right now and it remains to be seen if there is yet another freefall waiting at the top of this one.

This last week set up an interesting chart pattern, one that holds a future yet to be determined, however, the future looks much brighter at the moment as we sit above the coveted 200-day moving average.  With inflationary pressures in check, even the slight signs of an improving economy couldn’t keep MBS pricing from breaking through the proverbial roof.  The problem is inflation will likely still be seen, so it is likely just a delay of the inevitable, and could be seen in the fact the Fed is stating they no longer see deflationary risks.  Some signs of an improving economy that were seen last week included Personal Income rising which brought increased spending as well, though the savings rate continued to climb as well.  Durable Goods and Consumer Sentiment also gave the improving economy viewpoint a boost, and every the Treasury Auctions were met with strong demand, though there is speculation of official involvement, even if not publicly stated.

With the breakthrough that mortgage bonds needed, the question remains about their ability to hold on to those gains.  We will get back to the charts in a moment, but let’s get down to the “motivators” for this week, the Jobs Jamboree in particular.  We have plenty of data this week to sway the markets, causing a greater rise in MBS pricing, or even the next death-defying plummet.  Here is what is on the list so far…

• Monday:  3-month T-Bill Auction (1:00), 6-month T-Bill Auction (1:00)
• Tuesday:  Case-Shiller HPI (9:00), Chicago PMI (9:45), Consumer Confidence (10:00), Jim Bullard Speech (12:00), 4-week T-Bill Auction (1:00), 52-week T-Bill Auction (1:00), Thomas Hoenig Speech (4:10), Janet Yellen Speech (9:00)
• Wednesday:  MBA Purchase Applications (7:00), ADP Employment Report (8:15), ISM Manufacturing Index (10:00), Pending Home Sales (10:00), Crude Inventories (10:30)
• Thursday:  Non-farm Payrolls (8:30), Unemployment Rate (8:30), Average Work Week (8:30), Hourly Earnings (8:30), Jobless Claims (8:30), 30-Year T-Bond Announcement (9:00), Treasury Announcements (11:00), Money Supply (4:30)
• Friday:  Take a break, you may need it!

Ready for the next set of thrills on this wild ride.  I hope so, because this week is sure to have some thrills, spills, and maybe even some chills in it.  With this slew of data, along with the volatility that comes from a shortened trading week due to the Fourth of July weekend coming up, wild “mood swings” are very likely to occur and they may even get scary at times, much like we had in previous weeks.

Ok, but what do the charts really show?  Well, there are some negative signs, along with some positive.  Which news do you like first?  I think most like the bad, so let’s start there.  Besides, we want to end this report with optimism, right?

Here’s the bad news…

Stochastic indications are moving into the overbought spectrum, indicating a growing need for an MBS selloff.  As the week came to a close, the 25-day moving average dipped below the 200-day moving average, causing a negative crossover to occur.  Currently, the 50-day moving average is rushing down to meet the rising mortgage bond prices.  Friday and today so far are showing weakness, meaning we are likely about to see a drop and test of the 200-day as support.  That will likely come from the Chicago PMI, at least that is my guess based on what I am seeing.  With improvements being seen in the economy lately, along with better than expected Jobless Claims lately, this week may not present a leg for mortgage backed securities to stand on, especially since there are no reports directly pointing toward tame inflation.

OK, here’s some good news…

Mortgage backed securities are above their 200-day moving average and that has typically proven to be a strong level to break.  With the 25-day moving average not too far below it, we have a virtual double floor, and those same levels were powered through (prior ceilings) last Thursday, after 4 straight days of attempts.  If MBS pricing acts like it did last week, or if we get some favorable data this week, mortgage rates will likely hold or even head lower.  Another good sign is that the downtrend has been broken, so the future has gotten brighter.

The bottom line from my viewpoint is that MBS pricing, and thus mortgage rates, will be tested heavily this week.  I expect at least a pullback to the 200-day moving average, maybe more.  Beyond that, exactly what trend develops remains to be seen, but the future based on the current snapshot does not indicate mortgage rates rising, at least not significantly.  We should have a pretty clear picture before the week is done due to the increased volatility along with the plethora of data, speeches, and even Treasury actions.

Tagged as: MBS Commentary