I found myself in a rather strange situation this weekend since I was at home for a change (usually I am flying during the weekends).  The nice thing is it allowed my a chance to really look at all of the changes ahead, both in my life and in the mortgage market.  Let’s take a look at the mortgage market.

I mentioned in last week’s update that a trend reversal has taken place, and that reversal can now truly been seen in the charts as the downtrend has been shattered and MBS (mortgage backed securities) prices are now testing the levels last seen in early October.   Last week was light on data, leaving the Treasury Auctions as the main driving force besides technical indications.  As has been the case in recent Treasury Auctions, demand continued to be strong for the short-term Treasuries and that demand continued up to the 10-year T-Note this past week.  However, the 30-year Treasury Bond auction was disappointing, though despite the initial reaction to drive MBS prices lower, traders overcame the report and pushed the prices to new highs on the day.  If you remember, most mortgage rate advisory services knee-jerked and put out lock advisories almost immediately as prices tanked, which cost you and your clients a lot of money if you acted on them.  As the week came to a close, the Balance of Trade and Consumer Sentiment helped  mortgage bonds continue their move higher.

This week has already started off with a bang as Retail Sales has been released as I am writing.  As the week progresses, inflation will take center stage, as will other measures of the economy, such as the Philadelphia Fed Survey.  Take a look at what is currently on the list of scheduled events…

• Monday:  Retail Sales (8:30), Empire State Manufacturing Survey (8:30), 3-month T-Bill Auction (11:30), 6-month T-Bill Auction (11:30), Ben Bernanke Speaks (12:00)
• Tuesday:  Producer Price Index (PPI – 8:30), Industrial Production (9:15), Jeffrey Lacker Speaks (10:00), 4-week T-Bill Auction (11:30), 52-week T-Bill Auction (11:30), Housing Market Index (1:00)
• Wednesday:  MBA Purchase Applications (7:00), Consumer Price Index (8:30), Housing Starts (8:30), Building Permits (8:30), Crude Inventories (10:30)
• Thursday:  Charles Plosser Speaks (?), Jobless Claims (8:30), Leading Indicators (LEI – 10:00), Philadelphia Fed Survey (10:00), Treasury Announcements (11:00), Money Supply (4:30), Richard Fisher Speaks (4:45)
• Friday:  Charles Plosser Speaks (?), no data

While there isn’t a lot of major data plays, there are enough to continue to shape the markets, even stop the recent uptrend in its tracks.  If inflation finally begins to show its ugly side, chances are a trend reversal will take place, though any move lower may only be the needed retracement.  More on that in a moment, but first I need to highlight the Treasury Announcements as they will include the 2-year, 5-year, and 7-year T-Notes and the added supply may cause downward pressure on prices.  I also placed emphasis on today’s speech by Big Ben as traders are looking for justification of continued low rates while the dollar is being demolished.

Looking at the charts, once again you can see that trend reversal I discussed last week as it has become clear.  Tuesday’s move lower was not a solid retracement, but did prove that support existed, so we have yet to see a true retracement, which is coming, likely this week.  I expect a retracement, possibly all the way back to the 10-day MA (moving average), or even just below it.  Stochastic indications are now pegged at the top of the overbought spectrum on both scales.  While MBS prices are likely to pull back, it is important to note that the 50-day MA is crossing the 25-day MA and the 100-day MA looks poised to cross the 200-day MA in the coming week or so.  Things could change quickly, but for now, it appears the worst we will see is a new sideways trading pattern.

The bottom line for this week is to watch daily and expect mortgage rates to edge higher, then possibly resume the move lower. Chances are, at least for the moment, that a new sideways pattern will form, but I would go ahead an start locking clients at this point as I do not see mortgage rates getting much lower than this.

Tagged as: MBS Commentary, MBS Prices, Mortgage Market Analysis