Mortgage Rates Move Higher Ahead of Jobs Report

Mortgage rates moved higher today as financial markets transitioned from 2nd to 3rd quarter trading strategies.  Most frequently, we see things like economic data and news headlines pushing trading levels in bond markets in either direction.  Today we still saw that 4.25% was still the most prevalently quoted conforming 30yr fixed rate for best-case scenarios.

Roaring ahead, it seems there is no stopping the stock market. The DJIA and S&P made new highs this afternoon but into the close the index fell back a little, the DJIA just short of 17K and certainly looks like it will get there and pass it.  A fool’s rally or a fool for not being 100% long of stocks?  All this coming prior to the June employment report on Thursday, a key report that has a huge history of being quite different than what was expected.  Most know we have been expecting a huge sell-off in the stock market, yet we still were 100% invested, after today’s action we have to re-think how long and how much higher stocks will go before that selling we continue to expect.  You might say, calling wolf for long enough I may end up being right - well I said it first.  Today’s strong performance comes on better manufacturing output in a few major economies.  China’s manufacturing expanded in June at the fastest pace this year, while Euro-area output grew at a slower pace.  The Institute for Supply Management’s manufacturing index was 55.3 last month, little changed from a five-month high of 55.4 in May.

If this is the beginning of a new leg higher for the equity markets it won’t be good for interest rate markets. Some of decline in rates recently has been a prudent move of some investment money into safety as a hedge against what did look like a correction would occur.  Those funds, in the absence of any serious geo-political concerns should push interest rates higher as rotation back to fully vested stock portfolios. The benchmark 10yr note is now at its first technical support at 2.57%, a break above it will negate all of the bullish biases that have filtered into treasuries and MBSs and set a move to 2.65%, then 2.80%.  That said, let’s take it one step at a time - in a sense the strong rally today in equity markets ahead of the employment report suggests investors are confident that new job creations will be over 200K, we agree given the other recent economic reports but what kind of jobs were created?  If the stock market is in fact improving on a strong outlook for the US economy, how will the market react when the 10yr begins to move toward 3.00%?

In summary, today’s move makes locking today the best move if you need to lock this week. We have a long holiday weekend and I believe markets will reflect that by maintaining current levels, at best, with the potential for slight worsening. I still think we move lower over the next week and a half, so if you can stomach the risk and wait until next week, floating could be rewarded.