Mortgage Rates Fall Again – Markets Set for a Minor Comeback

Mortgage rates fell today, bringing them back in line with the lowest levels in more than 2 months and very near the best levels since late April 2015.  The surprisingly strong performance so far in 2016 is primarily due to a much weaker performance in risk assets like stocks and oil prices.  As investors sell stocks and oil, they are buying safer-haven assets, such as the bonds and MBSs, and the lower they go, mortgage rates fall.

The idea is that lower oil prices suggest economic weakness is true as far as it goes, but crude is falling primarily on huge oil gluts that even with a positive economic outlook would still be declining. Markets like to try to make it simple - presently oil is the primary reason given for equity markets falling. I stated in my blogs in the last two months that the global economic outlook was deteriorating, the low oil prices have been the blame but all global equity markets with the forecast of slow growth expected this year were, and still are, over-valued.

Now we are seeing no inflation because of these low oil prices that in turn have driven most all commodity prices down.  The Fed is twisted like a pretzel, leaning one way while the world is headed in the other direction. The perennial optimists tell us job growth is strong, but ignore the quality of most of the jobs. The perennial optimists six months ago were “sure” that lower gasoline would drive consumer spending higher, that has not and will not happen. When oil finds a bottom and begins to increase those that expected increased consumer spending would increase will face the slowing consumer spending as gasoline increases.

Tomorrow we have weekly claims and the Jan Philadelphia Fed business index. All key markets are now oversold and I expect some strong rebounds in the next few sessions that will rally stocks, crude oil and send interest rates up a little. Since the beginning of the year oil, stocks and bonds have been on a one-way path with substantial loses in over-extended valuations. Markets getting close for very volatile reversal - but I say this is only a minor comeback. I still believe as others have pointed out that the key indexes should drop another 10% or more before a true bottom is in place.

Next week the FOMC meets, and of course we can expect the policy statement very slanted to the positive side. The Fed is in a huge trap, there is no way out. All the bullish Fed speak will not by itself change to present tone. The Fed’s credibility presently at rock bottom - markets no longer believe all the chatter from regional Fed Presidents, economists all.

In summary, stocks slumped further today, and funds flowed into bonds.  Mortgage pricing improved. The benchmark 10yr US Treasury note is now yielding just under 2%, and the longer we hold at/below those levels, the better the outlook for rates.  I do believe we might see a little bit of a rebound, but unless you are closing in the next 15 days, I would continue to float.