Mortgage Rates Sideways and Up

Mortgage rates remained in line with their highest levels in a month for the third straight day.  This morning I talked about how most all economic releases over the past few weeks have been weaker than forecasts yet interest rates have been increasing. Normally that should not be the case even with the FOMC policy statement tomorrow and markets 100% convinced the Fed will not increase rates. Traders in the FF markets do not presently anticipate the Fed to move until later this year; definitely a moving target. Not news that Q1 was soft - interest rates have jumped from 1.70% on the 10yr note to 1.91% in three weeks and mortgage rates up about the same margin.  Housing starts and permits, existing home sales, new home sales  all less than forecasts. March leading economic indicators also less than estimates. The April PMI FLASH manufacturing index, expected at 52.0, barely above 50 at 50.8. Small business owners remain pessimistic, with the small business optimism index dipping another 0.3 points in March to 92.6. Retail sales, down a disappointing 0.3% in March (expectations were +0.1%), were pulled lower by auto sales but unfortunately do show wider weakness. Auto sales fell a very steep 2.1% in March. Why the disconnect?

On Monday evening 4/18 Eric Rosengren Boston Fed President in a speech may have been the trigger when he said he does not believe markets are not pricing in enough Fed monetary tightening at the current levels. He votes on the FOMC this year and until recently considered one of the Fed’s doves - that was the second time in the last two weeks he has commented on markets underpricing future Fed increases. Since his comment interest rates have been pressured even with disappointing economic measurements.

Soo far we have seen the auctions on the Treasury notes be soft.  This is not good.  Tomorrow at 1:00, markets will know what the FOMC thinks when the policy statement is released. No rate increase tomorrow, and the statement will emphasize data dependency still is key. It is a matter of what the Fed believes about inflation and economic growth going forward - that is open to interpretation by analysts but it rests with what the Fed thinks. There will be some key data right before the announcement.

As you know all of the work remains bearish. There is one ray of technical hope however. The 10yr has some technical support at 1.93% on a closing basis. Today at one point the note reached 1.94%. If 1.93%/1.94% fail the 10yr has room to increase to 2.00% before the next chart support. Do not fade the support, let it happen, as rates are too negative now and sentiment has grown increasingly negative. The increase in commodity prices over the last month is dragging on the long end of the curve. If the FOMC stresses inflation increasing tomorrow the bond and mortgage markets will have an even steeper hill to climb.

In summary, rates hovered near unchanged today, but trended slightly higher.  All eyes/ears are pointed to tomorrow's FOMC statement - its tone may set the stage for our next move up/down.  The bulk of my clients have decided to move forward and lock, as I do not anticipate the Fed's tone being dovish enough to drive rates down.  At this point, a neutral Fed statement might be the best possible outcome, I just do not see enough disappointing data to sway Fed members' desire to raise the overnight rate.  If you are still floating, be ready to lock, things can change quickly.