I managed to pull off another week of doing this report from my laptop in my home city, go figure. Unfortunately, the Fed was not up to the challenge of maintaining low interest rates through their persistent “buyer of first resort” strategy, and mortgage rates rose about .25% as a result.
Last week was a short week, which had few economic reports and was full of news. Of course, who could miss the inauguration of now president, Barack Obama, and the ensuing market chaos that followed. There were plenty of negative earnings reports to be seen, as were a few good ones, and that kept selling pressures in the stock markets. As the data flowed, once again we saw favorable news for mortgage rates, yet they rose. Why?
In one word, inflation. What? How could traders be worried about inflation when CPI and other indicators, not to mention Bernanke, all are stating inflation is “moderating” and under control? The answer is that while inflation may appear to be under control, government actions and the continued bailouts have thrown more lethargic rabbits into the system that will soon be waking up. The evidence is so clear that even Fed Governor Frederic Mishkin made the following statement…”inflation could come to the forefront, given all of the government programs…once the economy recovers, liquidity must be taken out of the markets“, showing his concern about the multiplying rabbits and the coming results.
This week will be chock full of data, so you can expect some solid basis for the direction of mortgage rates to appear by week’s end. Here is this week’s scheduled data…
- Monday: Existing Home Sales (10:00), Leading Indicators (10:00), 3-month Bill Auction (11:30), 6-month Bill Auction (11:30), 20-year TIPS Auction (1:00)
- Tuesday: Case Shiller HPI (9:00), Consumer Confidence (10:00), 4-week Bill Auction (1:00), 2-year Note Auction (1:00)
- Wednesday: MBA Purchase Applications (7:00), EIA Petroleum Status Report (10:30), Fed Rate Decision (2:15)
- Thursday: Durable Goods Orders (8:30), Jobless Claims (8:30), New Home Sales (10:00), 5-year Note Auction (1:00), Money Supply (4:30)
- Friday: GDP (8:30), Employment Cost Index (8:30), Chicago PMI (9:45), Consumer Sentiment (9:55)
As you can see, there will be added selling pressures as more Treasuries are auctioned this week, including the 5-year T-Note on Thursday. The Fed decision this Wednesday will also play a key role in the direction of mortgage rates, as will Friday’s data, which will likely show a continued weak economy. Chances are the term “stagflation” will be reentering the media this week, or at least soon.
On the technical side of things, mortgage backed securities have fallen below their 25-day moving average, but are holding on to some further support. That places them in a narrow channel between support and resistance which will likely break this week, one way or the other. Stochastic indications are favoring MBS being oversold, which is good for the outlook if you want lower mortgage rates. So, the picture presented by the charts is that mortgage rates will likely improve slightly before market forces drive them higher.
My expectations for this week will be that we will see mortgage rates get a notch or two better and then start climbing higher again, all of which could happen this week, that is if added supply doesn’t drive them higher without the correction.
