Mortgage Rates Continued the Movement Upward

Mortgage rates resumed their recent trend higher today as we saw more volatility in the MBS markets.  Yesterday was the first day since the end of June without any noticeable weakness - raising some hope that the negative trend might be running out of steam.  Although today's jump was not as big as some days last week, it nonetheless brings the average lender to the worst levels since May 11.

So what is driving this bus down the winding slope?  In a word – Europe!  Global interest rates are on the increase, the US led and now most rates are increasing in Europe and in Asia. The US 10yr in the last two weeks up by 24BPS, while the German 10yr bund more than doubling from 0.23% to 0.56%.

Tomorrow June employment data.  Usually a scramble as the data always has something not expected. The recent increase in rates should not be unexpected with unemployment at 4.3% and the Fed and its officials always commenting positively about the outlook for the economy; even when the Fed’s own quarterly reports on inflation and GDP growth show no signs of improving and inflation is weakening in the last two months. 

Crude oil declined $1.15 yesterday.  This morning the weekly EIA inventory levels were unexpectedly lower, a big drawdown. Crude prices increased over $1.00 briefly then fell back to about unchanged.

The North Korean missile launch on Monday has increased concern but still has had no noticeable impact on markets. Investors and traders find it difficult to believe the hermit country will actually attack the US and start a nuclear war.  

The movement in rates recently led by the rest of the world getting in line with the Fed’s desire to increase base lending rates – but I am not buying these beliefs from what I am reading. Rates are still historically low. Tomorrow’s employment data likely will increase volatility. Our models and all the oscillators bearish but in the short run oversold, expect volatility tomorrow and keep locked, there is little reason now to expect rates will decline enough to help consumers much. When, not if, the stock indexes reverse with rates higher as they will, then some improvement. The issue is not when but at what levels rates will increase before the global equity markets finally capitulate in a way overdue technical correction. Tomorrow expect more volatility in rate markets and equity markets.

In summary, it is very risky to be floating this market.  Bond markets gave back yesterday's gains and more today, as ECB minutes revealed their intentions to reduce their balance sheets (aka: 'taper").  Central bank bond purchases boost prices, lowering rates to achieve economic growth, and removing that stimulus raises rates.  The trend is not our friend, and will continue to not be our friend till it is not.   Plus, we have payrolls report tomorrow which always has the potential to move rates.   Only those that can afford to be wrong should consider floating right now.