Today is Labor Day, a day when we celebrate and recognize all of the accomplishments of workers, as well as the labor movement.  And today, we take a break to recognize the hard work that mortgage bonds did this past week in breaking through the ceiling of resistance.

The “squeeze play” I talked about last week is finally over and now we know what happens when you squeeze MBS prices, at least this time, which is lower mortgage rates.  I discussed that the “weaker” side was the ceiling and that is exactly the side that cracked, though a correction is still likely.  Let’s get into what happened last week.

We saw quite a bit of data, including the Jobs Jamboree.  The week started with the Chicago PMI, which beat expectations, but mortgage backed securities moved higher despite the data.  Next came the ISM Manufacturing Index and Pending Home Sales, also beating expectations, yet mortgage bond prices moved higher still.  But then it happened, the ADP Employment report predicted a better than expected Jobs Report and mortgage bonds moved higher still, but finally they hit strong enough resistance to back off.  Add to that the FOMC Minutes still discussed the recession having bottomed out but a recover would be slow and inflation being a non-issue.  Jobless Claims were slightly higher than last week, and Friday’s Jobs Report was in fact worse than expected, but not by as much as some believed.  So, as the week came to and end, it would appear a correction may be underway, as MBS pricing backed off to their 10-day moving average and currently hovering about their 200-day moving average, ending the week up 31 basis points.

So what lies ahead? 

This week is a shortened week due to the markets being closed today in observance of Labor Day, meaning increased volatility may be coming.  Data will be lighter this week, keeping technicals more in control, though there are some big players as well, such as Consumer Sentiment.  Here is the breakdown of currently scheduled data…

• Monday:  Markets closed for Labor Day
• Tuesday:  4-week T-Bill Auction (11:00), 3-month T-Bill Auction (11:30), 6-month T-Bill Auction (11:30), 3-year T-Note Auction (1:00)
• Wednesday:  MBA Purchase Applications (7:00), 4-week T-Bill Auction (1:00), 10-year T-Note Auction (1:00), Beige Book (2:00)
• Thursday:  Jobless Claims (8:30), International Trade (8:30), Crude Inventories (11:00), 30-year T-Bond Auction (1:00)
• Friday:  Consumer Sentiment (9:55)

As you can see, data is light, but some of the events and data will play a larger than normal role this week, with key focus likely being on Consumer Sentiment and even the 30-year Treasury Bond Auction. 

As far as technical indications go, we still have a mixed outlook, with the most likely ending being a sideways trading pattern forming, at least from how it looks right now.  We are almost guaranteed to see more of a corrective pullback, likely back to the 100-day moving average.  And that is where it gets a little tricky.  If MBS prices bounce higher off their 100-day MA, we will remain in good shape as we have the 25-day and 50-day moving averages moving in parallel to each other and closing in on the 100-day moving average which would provide a very nice positive crossover in the future.  However, if prices move do not hold, we will see a negative crossover as the 25-day MA drops below the 50-day MA.  Stochastic indications show a negative crossover and are in the overbought spectrum, signaling the need (and likely occurrence) of a corrective move lower.  So, overall it appears a move lower is going to happen, but mortgage bonds should hold and remain above their 100-day moving average, likely setting up a sideways trading pattern and possibly even an uptrend, though it is still too early to signal that.

As for this week, use caution as the correction takes place and ensure mortgage bonds hold.  You can also expect increased volatility this week due to the shortened trading week.  Overall, I expect MBS prices to drop and test their 100-day moving average and if it holds, a sideways trading pattern will likely result.

Tagged as: MBS Commentary, Mortgage rate forecasting, Mortgage Rates