Mortgage Market Update

Have you ever awakened and wondered what you were doing, or where you are?  As much as I travel, it happens to me once in a while and mortgage backed securities may feel the same way right now as they have been up and down a lot in the last few trading days and do not seem to know where they are, or where they should be going from here.

Last week saw a lot of data that came in reflecting the current state of the economy and inflation.  While Retail Sales came in better than expected despite the Consumer Credit contraction shown the prior month, PPI scared traders in to thinking inflation may be a significant problem (and may very well be in the near future).  Traders then were comforted by only slightly worse than expected CPI numbers.  Housing Starts were up again and most now feel we have seen the bottom of the housing market, though a recover is still a long way off.  Since most of the housing market data may be skewed by the $8,000 tax credit incentive, so there is talk about extending the incentive further than the current November 30, 2009 closing deadline.  Overall, for the week mortgage bonds dropped, rose, dropped again giving some traders whiplash.  Nevertheless, as it holds right now, the bottom of a long term uptrend and the long term tops have been closing in on each other, adding yet another squeeze play which I will elaborate on later.

As for this week, data will be fairly light, but that does not mean we won’t see some heavy-hitters.  This is the next version of “Fed Week” as we will see the results of the FOMC Meeting released on Wednesday.  Remember to focus on the Policy Statement and not their actual Fed Funds Rate decision.  I should be back to doing my normal Fed Policy Statement breakdown on Florida Mortgage Report this week as well.  Here is the current list of this week’s scheduled events…

• Monday:  Leading Economic Indicators (LEI – 10:00), 3-month T-Bill Auction (1:00), 6-month T-Bill Auction (1:00)
• Tuesday:  FHFA Housing Price Index (10:00), 52-week T-Bill Auction (11:30), 4-week T-Bill Auction (1:00), 2-year T-Note Auction (1:00)
• Wednesday:  MBA Purchase Applications (7:00), Crude Inventories (10:30), 5-year T-Note Auction (1:00), FOMC Meeting Announcement (2:15)
• Thursday:  Jobless Claims (8:30), Existing Home Sales (10:00), Cristina Romer Speech (1:00), 7-year T-Note Auction (1:00), Money Supply (4:30)
• Friday:  Durable Goods Orders (8:30), Consumer Sentiment (9:55), New Home Sales (10:00), Kevin Warsh Speech (1:15)

As you can see, Wednesday and Friday are the bigger days to watch for market movement, though anything can happen this week, especially when you look at the technical indicators.

Once again, we have a couple of trading patterns that are in play, with a squeeze play of sorts occurring in the long term as an upwards trend line continues along the bottom of the current MBS pricing levels, capped by a flat trend line across the top.  Using that same flat trend line on top, we also have the mid-term sideways trading pattern in play, which will likely be the final determination of where mortgage rates are headed, that is unless some catalyst can propel them “through the roof”.  We also a a sideways pattern that is fairly narrow within the short term.  Stochastic indications are flat and could go either way, though the fast stochastic does show a slight advantage toward upward movement from today’s current pricing.

The bottom line is that I expect the narrow sideways pattern to hold, then possibly break later into the larger sideways pattern.  I do expect that the long term uptrend will eventually fail to push mortgage backed securities through the overhead resistance, but I cannot completely rule that out, at least not yet.