10/17/2016 - Mortgage Rates At 4-Month Highs

Mortgage rates remained near 4-month highs today, despite moderate improvement in underlying bond markets.  Currently we are on the path for higher rates, even though it seems like we are taking a bit of a breather right now.

Data this morning was fractionally weaker than estimates. September industrial production and factory usage were lower than anticipated. Manufacturing remains soft as the NY Empire State Fed manufacturing index also was lower than originally anticipated.

Markets continue to expect the Fed to increase the FF rate at its December meeting. Rates moving higher and the dollar has rallied in the last few weeks. The increase in the dollar is causing the carry trades to slow carry trades generally involve buying weaker emerging market currencies then borrowing in a better economy currency to fund a position. As bond yields in advanced economies edge higher, this weakens the attractiveness of foreign exchange carry trades - ones in which the expected returns of a position are driven more by interest rate differentials on shorter-dated sovereign debt than by the change in one currency’s spot value relative to another.

The equity markets continue to trade in their ranges with no directional movement for weeks now, many see the indexes are about to succumb to increased selling but a lot depends on how investors handicap the election results. Should keep markets in flat ranges, particularly tomorrow and Wednesday ahead of the third debate. Should be a lot of mud and insults flying with little substance as were the first two debates.  

In summary, nothing has changed here, as I still expect rates will increase but presently consolidating the swift rate increase since the beginning of October. MBS prices slightly better but not much. This is earnings season once again, and a lot depends on how earnings and guidance is delivered.