Good morning. I hope you all enjoyed last week’s move lower in mortgage rates and this week promises to be full of excitement as well. The question is will the excitement keep mortgage rates moving lower or send them back higher.
As last week played out, mortgage backed securities benefited from the sell off of stocks globally and decent Treasury auctions that played out through Wednesday. With economic data being fairly light throughout the week, news and technicals lead the way, as well as the typical money flows between stocks and bonds. Everything seemed to be going mortgage bonds’ way until Thursday when a surprise in the Jobless Claims numbers came in better than expected, followed by a lackluster 30-year Treasury Bond auction. News that is surrounding the first stimulus package and the fact that Congress admittedly didn’t read it and passed a major spending bill that didn’t include hardly any stimulus, rather more “social” programs. Earnings season has begun and so far it has been as expected, signalling a still soft economy.
News continues to play out, and some of it (if not most) will not be favorable to MBS pricing moving forward. Chances are that the news surrounding the failed(?) stimulus package and the fact Congress is spending massive amounts of money without even reading where it is going, nor forcing any accountability, will continue to hit the airwaves and may place pressure on mortgage bonds. Additionally, since Biden is already saying they “underestimated” the jobless problem, more stimulus, meaning more Treasury supply and inflation, may be on its way. Earnings reports will continue to come in this week and financials will take center stage. While I don’t have an earnings calendar for you, here is what is currently slated as far as data and other events are looking at this time…
- Monday: 3-month T-Bill Auction (1:00), 6-month T-Bill Auction (1:00)
- Tuesday: Producer Price Index (PPI – 8:30), Retail Sales (8:30), 4-week T-Bill Auction (1:00)
- Wednesday: MBA Purchase Applications (7:00), Consumer Price Index (CPI – 8:30), Empire State Manufacturing Survey (8:30), Industrial Production (9:15), Crude Inventories (10:30), FOMC Minutes (2:00)
- Thursday: Jobless Claims (8:30), Philadelphia Fed Survey (10:00), Housing Market Index (1:00), Money Supply (4:30)
- Friday: Housing Starts (8:30)
It is quite clear that this week will be action-packed when you look at that schedule. Both inflation and economic activity will be in the spotlight as the week plays out and that will shape the future of mortgage rates for some time to come. With the latest economic data giving traders a slight reason to be optimistic about the economy, that could pressure mortgage backed securities lower, though the fact inflation has been in check according to the latest data, traders may find comfort and keep MBS pricing moving higher.
Looking at the charts, we are wedged between the 50-day and 100-day moving averages, and MBS pricing has moved considerably higher without a significant correction, which is cause for some concern. Stochastic indications remain in the overbought spectrum with a negative crossover occurring late last week. If mortgage backed securities can hold their ground, they will likely receive the strength they need to break through more resistance and continue their uptrend. Ever since they turned higher, they have remained above their 10-day moving average, which has just crossed the 50-day moving average, and that is a good sign. Additionally, the 25-day MA is rushing up and appears eager to cross the 200-day MA, another positive sign.
What I am seeing is a correction at least back to the 50-day movign average occurring this week with the next move higher coming as well, likely this week with all of the data playing out. Of course, if the data comes in unfavorable, especially if inflation is no longer seen as tame, the uptrend will likely be broken and the future will change from what is pictured today.
