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Tuesday, October 18, 2016

Mortgage Bond Market Analysis - No Data Surprises

It's Tuesday and we are on track for another positive day in the bond market.  On Friday, the FNMA benchmark bond closed down 29 basis points.  Yesterday, with no economic data released, the bond recovered a bit, closing up 15 basis points.  Today's data came in as expected, for the most part, and the bond continues its recovery as it is up 12 basis points.  The RSI has risen just above the oversold threshold and the bond tested the 1st support level of 103.30 which is really acting more like a resistance level because it is below the threshold at 103.25 but actually got to 103.33 before selling off a bit.

Economic Data:  The September MOM CPI came in as expected at .3% - a fairly strong reading.  The core reading came in a bit lower than expected at .1% vs. expectations of .2% - this is a good showing for inflation.  The core YOY came in at 2.2% vs. expectations of 2.3%.  The NAHB Housing Market Index came in as expected at 63 which is very strong since any reading over 50 shows growth.

The benchmark bond may have bottomed out for now.  It is currently up 18 basis points and 1 basis point above the 1st level of support, 5 basis points below the 1st level of resistance.  Not sure how much higher the bond will go since the data was as expected today.  Tomorrow we get housing starts, building permits and the Fed Beige Book.  Thursday brings us the Philadelphia Fed Manufacturing Index, existing home sales, leading economic indicators along with jobless claims.

As of this moment, the bond is up 14 basis points.  There is a lot of resistance as it tries to move higher with the 1st support level right above the current price and the first resistance level six points above that.  Then you have the moving averages beginning with the 100-day that's at about 103.48, then the 50-day at about 103.58 and finally, the 25-day at about 103.68 and then you have the 2nd resistance level at 103.72.  With all of this resistance, I continue my recommendation to lock on any up days.  We've had a couple in a row now so if you haven't locked, this would be a great time to lock.  If you do float, keep a close eye on the market.

Friday, October 14, 2016

Mortgage Bond Market Analysis: Economic Data and Janet Yellen's Comments

If nothing else, it's Friday and that means lots of college football tomorrow (and probably some BBQing and just good food in general).  After Wednesday's fall of 30 basis points, the FNMA benchmark bond recovered most of the loss yesterday, closing up 21 basis points.  Today, the bond has been on a bit of a roller coaster ride although more of a kiddie version with the range being on the narrow side with a high of 103.32 and a low of 103.09.  It opened at 103.27 so it's been up as much as 5 basis points and down as much as 18 and it is currently down 13 basis points after recently seeing its high.

The drivers:  August Business Inventories came in as expected, up .2%.  September Headline Retail Sales also came in as expected at +.6%; ex-autos it was slightly better than expected at .5% vs. expectations of .4%.  The PPI came in a bit hotter than expected with a reading of .3% vs. .2% expected.  Both the MOM and the YOY Core PPI came in as expected at .2% and 1.2% respectively.  This data is all a tad bit negative for pricing and is why we are seeing some pressure to sell.  Where we are getting some support is from the October Preliminary Michigan Consumer Sentiment Index that came in much lower than expected at 87.9 vs. expectations of 91.9 - better jobs numbers don't seem to be translating into more confident consumers in spite of better retail sales this month - you may recall that they were weak last month and that the NFP from last week was also on the weak side though the Labor Participation Rate has increased.  This is all a bit confounding - a word Janet Yellen used in her comments this morning.

Janet Yellen's comments:  From the Associated Press - "Federal Reserve Chair Janet Yellen says the slow recovery from the Great Recession has surprised economists, confounding long-held beliefs about growth and inflation. Her remarks at an economic conference may help explain why the Fed has been reluctant to raise U.S. interest rates."  "She says the aftermath of the crisis has "revealed limits in economists' understanding of the economy." For example, tumbling home prices reduced consumers' willingness to spend more than economists had envisioned. And a steady decline in the unemployment rate has failed to lift wages and inflation as much as expected."

I would expect this dovish comments to have a positive impact but so far that has not been the case.  Perhaps bond traders were hoping for more direction in her comments but there was no mention about interest rates regarding when the Fed might next raise them.  They raised them last December and the stock market proceeded to take a big tumble so they are being extra cautious.   We are very close to our recent lows and the RSI remains below the oversold threshold.  With the election drawing near, I think traders might be a bit skittish about who will win and how that might impact the economy.  The fact that China's inflation rate was higher than expected isn't helping.  I would lock on any up day in the bond market and would probably not wait for an up day since the resistance seems to be stronger than the support and the support is a fair amount further down than the resistance is up.  

As always, I'm happy to help and in spite of all the college football over the weekend, I'll be available if you need me.  I can be reached at 801-893-1737 or 702-812-1214.  Make it a great day and a better weekend.    

Tuesday, October 11, 2016

Mortgage Bond Market Analysis - Mixed Data: Where's the Market Headed?

Happy Tuesday.  The bond markets were closed yesterday for Columbus Day but are swinging back into action today.  The FNMA benchmark bond was down as much as 31 basis points before doing an about-face - it is now down only 8 basis points as the first level of support at 103.3 held strong.  The flip side is that the first level of resistance (103.55) also seems to be strong as well.  The RSI is oversold so there could be some buying but would it be enough to push through the resistance level?  The sooner the better since the first resistance level is only two days old and may not be all that strong yet.

From a data standpoint, Non-farm Payrolls came in at 156K for September vs. estimates of 175K.  This is over a 10% miss and it's also somewhat week for an economic recovery.  That said, August NFP numbers were revised upward to 167K from 151K - a 10% upward revision so that helps to offset the miss.  Additionally, the Unemployment rate came in at 5% which is higher than last month's reading of 4.9% and while that might be bad in some cases, in this case, it's actually a positive because of the increase in the Labor Participation Rate.  Average hourly wages came in as expected at +.2%.

If you or a client / friend have a loan in process, you might want to think about locking.  I'm not sure that there will be any big moves upward in bond prices which would push rates lower.  There's a decent likelihood that the benchmark bond will be trading in a very tight range.  You can lock now and take advantage of the great rates that still exist or you can float and if the RSI is accurate - it isn't always a great indicator - then you could pick up some better pricing if the bond trends up in the near future.  As always, I'm happy to help any way I can.  Make it a great day and a better week.

Wednesday, October 5, 2016

Mortgage Bond Market Analysis - Did you lock?

Happy Hump Day.  My calendar is a bit off this week since I was still on my short vacation on Monday so yesterday was my Monday and it's hard to believe that it's already Wednesday.

On Monday, September 26th, I recommended locking as I thought we were close to the top if we weren't there.  I thought there was a much greater risk to a sell-off than there was potential for more significant buying.  The next day gave us five more basis points, which is basically nothing as about 50 basis points is .125% in rate, and on Wednesday morning with the market opening a bit higher, I reiterated my recommendation to lock.  I thought the data, as well as the fundamentals of the bond, warranted it.  Let's take a look at the chart:

The FNMA benchmark bond closed down 13 basis points on Wednesday and then bounced back 4 basis points on Thursday.  It closed down another 5 basis points on Friday and 6 on Monday followed by a 34 basis point fall yesterday and it's currently down 12 basis points for a total of a 66 basis point loss since my lock recommendation - this translates into an increase in rate of about .125% plus some additional costs for the new rate.
The Economic Data
It's Jobs Week and the ADP Private Payroll Report came out today and it missed expectations, coming in at 154K (on the weak side for a "recovery") vs. 166K expected.  The real kicker today is the ISM Non-manufacturing Index (Services) which came in at 57.1 (very strong) and obliterated the estimates of 53; this is very bad for pricing although the ADP numbers will offset this to some extent.  Additionally, August Factory Orders were .2% vs. estimates of -.1% - also negative for pricing (which means bad for rates).

Where do we go from here?
Much of it depends on the data the rest of the week with a few key data points being released including Jobless Claims tomorrow (not usually a big market mover) and Non-farm Payrolls, Unemployment Rate and Wholesale Inventories on Friday.  With the sell-off, a lot of profits have been taken off the table so we could see some buying if the data warrants  it.  Potential buying will also be dependent upon where the bond closes today.  If the 1st level of support (103.40) holds - it is at 103.46 right now - traders could have confidence that we've reached a bottom for this little run and with the right data, they could decide to buy a bit.  The fact that the RSI is also approaching oversold could help.  I have two thoughts, though.  The first is that our high last Wednesday of 104.28 was the highest points since the bond hit 104.40 on July 6th - a day where it ended up closing down.  We are now 82 basis points off our recent high and while we could see some rebound in bond prices based on reasons just mentioned, I don't expect the buying to push prices beyond recent highs.  The other side of that coin is that while expectations for a rate hike are for the December meeting at the earliest, we also have the election which brings much uncertainty as does the geo-political events that are happening.  Uncertainty is good for bonds since they are considered safe-haven investments.  The perception of who our president will be and how he / she will do will also play a role in the decisions of traders to buy or sell bonds.  For now, I would float with caution.  My guess is that the jobs numbers will be on the weak side, even if they meet expectations.  If you do float, make sure you are staying on top of the market in case of a quick move in the wrong direction so that you can lock quickly, perhaps before a re-price for the worse.  I'm always happy to help so feel free to contact me if I can help with anything mortgage related - 801-893-1737 or 702-812-1214.  Make it a great day and a better finish to your week.