Mortgage Market Update

I am running behind schedule today, but things continue to play out exactly as I said they would in last week’s update.  Here is how I ended the Mortgage Market Update last week…

The bottom line this week, expect a swing higher in MBS prices (lower mortgage rates), followed by the resumption of a new leg in the downtrend.  Also, as the Fed makes its announcement on Wednesday, remember not to worry about their decision on rates so much and focus on their Policy Statement.

MBS prices did exactly that, moved higher to about the 50% retracement level, which is a solid retracement.  Then they began there collapse, ultimately beginning what appears to be the next leg lower.  The Fed’s Policy Statement was essentially redundant from last FOMC Meeting and held no surprises.  There is some concern on the inflation side of the equation and that will be on the forefront this week as well.  Overall, we remain seeing slow but steady economic growth and inflation appears to be ramping up again.  All things told, including moves in the dollar, allowed that retracement and then sent mortgage backed securities on their true path.

The week ahead will not be an easy one for MBS prices as volatility will likely be to the extreme as we are in a holiday-shortened week.  The mortgage bond market will close early (at 2:00) on Thursday and be closed in observance of Christmas.  And while data is non-existent today, the week will have plenty in store to possibly create havoc just in time for Christmas.  The question for the week is whether mortgage backed securities will get a nice present, or a lump of coal.

Here is the currently scheduled breakdown of data and events…

• Monday:  3-month T-Bill Auction (11:30), 6-month T-Bill Auction (11:30)
• Tuesday:  GDP (8:30), Existing Home Sales (10:00), FHFA House Price Index (10:00), 4-week T-Bill Auction (11:30)
• Wednesday:  MBA Purchase Applications (7:00), Personal Consumption Expenditures Index (PCE – 8:30), Personal Income (8:30), Personal Spending (8:30), Consumer Sentiment (9:55), New Home Sales (10:00), Crude Inventories (10:30), Treasury Announcements (11:00)
• Thursday:  Durable Goods Orders (8:30), Jobless Claims (8:30), Bond Market Closes (2:00), Money Supply (4:30)
• Friday:  MERRY CHRISTMAS!!!

While the main player of the week is the PCE report on Wednesday, the other reports could easily cause a market move in today’s environment, especially the GDP and Durable Goods Orders, along with Consumer Sentiment.  News can also have a huge effect on the markets, such as the announcement that Health Care “Reform” has passed the Senate test and may be rammed down our throats in time for Christmas.

Looking at the charts, things remain mostly negative. The 10-day MA has now moved below the 50-day MA as expected.  MBS prices are now testing support at their 100-day and 200-day MAs, the latter being the current MBS pricing level.  Stochastic indications have moved out of the oversold spectrum and are turning negative again with today’s move.  We can only hope the 200-day MA holds again, but momentum simply does not favor that happening.  The key to MBS’s survival, and low mortgage rates, may very well rest on the PCE report.

The bottom line this week is to play it day-by-day again and hope the 200-day MA holds and we can stop the “bleeding”.  From what I can see, especially with the gap lower today, we have begun the next leg lower and higher mortgage rates are on their way.

Have a good week and a very Merry Christmas!!!