Mortgage Rates Up - Not a Good Day

Mortgage rates rose moderately today after hitting their lowest levels in eight months yesterday.  This morning I may have sounded an alarm as the market opened in negative territory as both the 10yr and MBSs were not favorable, and it looked like the direction they were going would not stop.  Overall, it was not a good day, as the MBS prices took back all of yesterday’s improvements and the 10yr note increased as well, but is still lower than on Tuesday.  The mortgage markets is still reeling over the Fed’s decision to begin rolling off its balance sheet, the plan is to cut MBS re-investing by $4B each month likely to begin at the September meeting, then another 0.25% increase in FF at the December meeting. There are still some of us that are still bullish with this view. Beginning to unwind the balance sheet is another way to tighten.

This morning weaker data in May industrial production from the forecast.  The manufacturing sector declined, and it was anticipating an increase. Vehicle production fell sharply in the month as it continues to remind us that consumer spending on autos has been very weak this year. And in a reminder of how weak capital goods data have been, production of business equipment also fell. 

From the news yesterday and combine that with today’s news, the inflation level remains below the Fed’s 2.0% target.  Yesterday there were remarks from the Fed that maybe it needs to lower its target. If you cannot reach your goal, lower the goal posts?

The dollar holds a key for bonds and mortgages - as long as the dollar remains soft and foreign investors expect the dollar to stay weak it adds to the demand for US assets. “The dollar rose to its highest in more than two weeks today as solid readings on the U.S. economy helped strengthen the case for the Federal Reserve to continue tightening monetary policy this year”….a quote from one of the news wires.  Be careful what you read, the data today was fractionally better but the data came from very volatile reports (Philly Fed and Empire State indexes), both import and export prices declined, weekly claims lower but no longer any significance in the weekly data. The dollar index, DXY, which tracks the U.S. currency against six major currencies, rose to 97.557, its highest since May 30.

NAHB reported the housing market index fell as well as May’s figure was also weakened.  The sales stayed strong but buyer traffic dropped to 49 (under 50 is considered contraction). The emphasis is on first-time buyers and does not point to renewed strength for home sales data which started the year very strong but have since slowed. Overall however the housing sector continues to get high marks but nowhere it has been in history when housing always led the economy out of recessions.

In summary, bond markets surrendered a portion of yesterday's gains, and rates will have to overcome significant resistance to drop much further.  More risk-averse clients should consider locking due to the bond market weakness seen since yesterday's Fed announcement.  Risk-tolerant clients can take heart in the fact that bond markets are holding onto slightly better levels than they did last Wednesday (the last time rates bounced after hitting 2017 lows).  This keeps the trend generally positive over the past month.  If rates continue much higher tomorrow, that trend would increasingly be in question.