Mortgage Rates React Positively to China’s News

China is today’s story - devaluing its currency with the largest devalue in its history. The surprise move roiled all global markets and boosted moves to government bonds. Commodities resumed their decline, crude oil price the lowest in six years - deflation is increasing. The Fed’s rate increase is now back on the tale as to timing - any increase next month is likely to increase the strength of the US dollar adding more drag on the US economy as exports will slow even more. Markets worried that Beijing’s move signaled concerns over growth in the world’s second-largest economy. This may be the beginning of another currency war similar to what occurred when the ECB launched its QE programs.

A move like that was completely unexpected and implies China’s leaders are increasingly worried the Chinese economy will continue to contract. Unexpected moves always send investors to safe havens - US treasuries. The market volatility will be excessive for the next few sessions. The 10yr note yield broke its resistance at 2.14% dropping to 2.11% before edging back to 2.14% by the end of the day. I have consistently believed global growth is slowing and will soon have a more direct impact on the US economic outlook.

The stock markets around the world were hit today - will the US equity market digest the new situation and shrug it off? How long will US equities manage to hold at these levels is a major question. Volatility is increasing making trade decisions more tedious. Until the July employment report last Friday, a number of economist were looking towards December for the Fed to move, but I have all along stated that there would not be any in 2015. The probability now for a September move has slipped to 45% from 53.5% on Monday, according to CME FedWatch.

In summary, the currency wars just picked up with China drastically cutting the value of their currency to make their exports more appealing to consumers. This was good news for interest rates around the globe. Until yesterday, I favored locking once within 30 days of closing. Today, I think floating was the way to go to see how this plays out – however floating in this kind of volatility has increased risks.  Some of my clients do not like such and I locked a few in knowing that what we have now is extremely better than what was discussed 30 days ago.  Weaker currencies around the globe might cause pause for the Fed to hike rates here as a stronger US dollar will spur deflationary fears and hurt our exports.