Mortgage Rates Pull Back After Threat from North Korea

Mortgage rates saw a knee jerk this morning in the stock and interest rate markets on the news that North Korea launched a short-range missile yesterday over Japan.  Risk off trades were the momentary take away this morning. The DJIA declined 135 points and the 10yr note, driver for mortgage interest rates, hit the target I forecasted two weeks ago at 2.10%. Technically it is a level that will not easily be penetrated, the low rate this year and it will take a lot of trading in and around it to push rates lower. Fundamentally, something much more than the North Korea bluster that has been going on now for four months to push rates lower. Do not overlook that the ECB is likely to begin withdrawing its QEs and is likely to increase its base rate next month - that though is not set in stone but traders are aware of the possibility.

This week is employment week and between now and then markets have many key economic releases to digest. I have been in a locking mode for the past several weeks as we have seen the bottom, even though we are itching even lower.  Some have elected to float, but of course, given me the green light to do what I feel is best. 

The Texas and now Louisiana floods still are not baked into the bond or stock markets. It is not over and getting worse according to all the news reports. Some benefits from it for markets, while some problems also. Inflation has baffled the Fed and the ECB for two years, prices of building materials are about to explode higher but once the water recedes unemployment ranks will increase. Likely temporary as we see it now, but if unemployment lasts more than a couple of months it will be another hurdle for the stock indexes already well over-bought. Too soon to have any real forecasts but be sure the pundits will be out with all kinds of opinions and estimates.

Need to keep focused now on next week when Congress returns and must tackle the coming debt ceiling and those tax cuts that Trump and most Republicans promised last year at the election. The debt default will be avoided, take it to the bank but the way it is done will have a wider impact on any tax cuts. Trump as you know made threats last week to close the government if he did not get the money in a bill to build his Wall, we doubt he will get it, equally doubt he or Congress will let it happen. Any debt issues and plans to dodge the bullet will likely cause the debt rating agencies to lower the US debt rating -  Fitch did lower the US debt rating when we had tis bi-annual issue in 2011.

Tomorrow the weekly MBA mortgage applications will come out, along with the August ADP private jobs report, expected +182K, look for revisions to July and June; ADP sets the start of the guessing about the official BLS data that will be released on Friday morning. Also, tomorrow we get the second, or preliminary look at Q2 GDP, the advance report last month was GDP growth at 2.6%, it is thought to be revised to 2.7%.

In summary, unexpected news regarding missile launch by North Korea over Japan has helped bonds improve to their best levels since mid-June.  My clients are looking to take advantage of the improved rates and locking in today.  Unless the North Korea situation escalates, I do not see bonds being able to extend the gains much further.  Lock in if within 30 days of closing today.