Mortgage Rates Higher Starting a Short Week

Kind of an unusual week as we start off with a bang – well, it is the Fourth of July Holiday, as this week is a short one.  Short hours today (NYSE closes at Noon and Bonds at 1:00PM), tomorrow closed, then three days before the weekend. This is employment week on Friday. in the meantime, there are a few key economic reports. Overnight the 10-yr yield hit our key technical support at 2.32% but by 7:30 back to unchanged at 2.30%.  Trade volume today should be thin as many are not working, enjoying a 4-day weekend.

Crude oil is continuing to improve. Last week up over $3.00 after two weeks of strong selling, from $54.00 early April to $42.50 2 weeks ago, now $46.39. The dollar has been bashed to a fare-thee-well since the IMF said it was too high, US debt was becoming worrisome and ECB sending signals that QE may be lessened. A twist: until the last 10 days, the weakened dollar had been a support for US bond markets with foreign buying the main prop. Now the pendulum has swung the other way, with increasing belief US interest rates will continue to increase. That said, there is an enormous amount of bullish talk and ink about central banks, and the Fed that I doubt has little confidence behind it, talking up investors’ and money managers’ positions - heavily invested.

June ISM manufacturing index, expected at 55.1, increased to 57.8, the highest this year. The new orders component at 63.5 from 5.5, employment at 57.2 also higher. Also May construction spending was thought to be +0.5% but was unchanged from April although April was revised from -1.4% to -0.7%. The reaction to the ISM dropped MBS prices 13BPS and the 10yr went to 2.32%.

All the rate markets in Europe are better this morning. Stock indexes continue to increase today after a soft week last week. The overwhelming view is still quite bullish for future gains, even with numerous comments of overbought technicals. I expect the DJIA has energy to move up to the 23K level within the next four months, but when (if) that target is met, the equity markets will likely drop 10% to 15% in a very short but volatile period. For now, though, the outlook remains good and investors are eager to buy any dips.

The 10yr bearish but at critical technical level at 2.32%. MBS markets very thin and subject to wide and quick swings through the day (although not today). The Fed talking about backing away from MBS purchases will eventually cause MBSs to widen against treasuries, the spread between mortgage rates and the 10yr should increase. Look for increased mortgage rate volatility again this week. Even with the shortened week, we have a lot of market moving data for the week.