Mortgage Rates Shows Signs of Improvement

Mortgage rates showed some signs of improvement this afternoon after a wild ride this morning following the Jobs Report. Typically, a strong jobs report is bad for rates.  This one likely would have been bad as well, but the markets had become too conservative and was heavily short.  Upon the release, the traders with very short bonds began removing some shorts. Not a wholesale dumping but enough to improve the rate markets today. The outlook remains bearish – but I will say the one technical support that held was the 10yr Treasury note, which was at 2.62% but closed at 2.58% today. 

The stock market also struggled a little today although it did close higher but off the opening levels.  The equity markets still technically overbought - but so far money continues to flow in and keeps the indexes from the overdue correction that is expected even by the most bullish of money managers, hedge funds and big investors, and now small investors.

We all need to see what happens in the equity markets.  This will be the one-way interest rates may pull back if selling emerges. Unless that happens, we do not see any reason now that rates will decline much and more likely they will move higher. The stock market is treading lightly up its path.  The VIX (volatility index) is almost the lowest on record, which is not a positive for equity markets. As the adage reminds - markets move on a wall of worry, not so now. Complacency also leads to bad outcomes as investors relax, putting any sense of anxiety in the background, that is a warning sign. It is just one sign - most others still point to increasing equity prices. My point is not that stocks will roll over soon - although I have stated it a few times here as I still expect it to happen.  It is that if interest rates have a chance of some minor improvements a stock market decline must lead it. So far, this year the stock market has not even had a 1.0% decline. Low interest rates are one fueling factor for investors and that is ending now. How much longer will it take, and from what levels, for stocks that in my view are excessively over-priced now? Do not stand in front of a moving train.  

Next week the FOMC meeting begins on Tuesday.  With that, we also get several key economic indicators, which usually take center stage but all eyes will be directed at the Fed.  Next week will be volatile, so it would be best to see what happens Monday and make a call if you have not yet locked.

In summary, despite a big beat on the payrolls report, bonds managed to post some gains ending a long losing streak.   With today being Friday, banks were slow to pass along any gains.  Not so sure we will see much follow through next week with FOMC coming up on Wednesday, but I think I would float over the weekend and evaluate pricing on Monday morning.