Mortgage Rates at 8-Month Lows

Mortgage rates were at three month lows yesterday and today have moved in line with eight month lows. This month has been great for interest rates. The global and domestic economies slowing, the Fed still fighting the inflation outlook and stocks extremely volatile, correcting the over-valued levels of last year. The interest rate markets saw sizeable declines as MBS prices gained substantially.

The Bank of Japan shocked global markets today, cutting its deposit rate for banks from +0.1% to -0.1% in another central bank move to fend off deflation and improve its economy. Two central banks now with negative deposit rates - ECB and now Japan. Meanwhile our Fed is determined to increase rates and is flying solo against most all other central banks. The action from Japan has set off another untraveled route to consider. Regardless of our Fed and its current economic outlook, it stands alone now, choosing to push the weakening global economic outlook to the back of the stack. The dollar will strengthen adding more problems for multi-national corporations domiciled in the US - housing is improving and lower rates will help but homeownership is not the priority it has been for the last 60 years, auto sales will stay strong but less sales than last year.

Interest rates are likely to head lower, but the run lower is not going to be easy as it has been this month. Contrary to what the Federal Reserve presently believes, the US economic outlook is softening. There is no inflation and even with crude prices coming off the lows recently it will not have any positive increase in inflation .levels. There is no pricing power, not likely wage increases will be much, and the strong auto sales the last two years will slow this year.

Next week is employment week for January, as well as other key reports. Both national ISM indexes, personal income and spending, Q4 productivity and unit labor costs. Also next week after a week of peace with no Fed officials some will re-surface. No Treasury auctions next week.

This week crude oil added volatility with rumors of a production cut, but it is always good to look at movements on a week to week basis - crude this week increased just $1.39. The 10yr at 1.92% this afternoon, the next technical resistance is 1.85% set last April. I continue to believe rates will decline but as noted, the road will be fraught with chuck holes and periodic uncertainty. While I am bullish, the markets and the Fed are presently confused. The move today by the BofJ will take a week to digest before most get on the same page - whether right or wrong it will be a trading affair. The US stock market has a lot more room to fall, looking for DJIA to drop to 13 or 14K this year.

In summary, bonds opened strong, and maintained most of their gains, after tepid GDP data and a surprise rate cut by the Bank of Japan.  Treasuries are now well below the 2% which is encouraging.  The wild card in today's rally is whether end of month buying accounts for part of our rally.  As gruesome as it might seem, world-wide economic distress helps rates, and it appears there's more of that to come.