Mortgage Rates Lower Despite Flat Market

Mortgage rates continued lower today, despite an absence of improvement in underlying bond markets.  That is not too surprising considering that most banks did not fully adjust yesterday's rates to reflect market improvements.  Unlike yesterday, today was essentially flat for bond markets as investors prepare for the news for the rest of the week.  Jobs reports and FOMC all in one week certainly drives me nutty – but many of you already knew that.

Tomorrow it begins with October’s ADP jobs report (210K from 135K in Sept), followed by the FOMC policy statement tomorrow afternoon (1:00PM). Also tomorrow the October ISM manufacturing index) and September construction spending. Data these days always gets a good look but not as much currently as focus is mostly on corporate earnings, the appointment of a new Fed Chair (Thursday) and most important the Republicans are expected to release the details on the tax cuts.

The betting is Jerome Powell a present Fed governor for the Fed job.  He is not an economist, maybe that is what is tilting Trump toward him. Most business men and entrepreneurs do not align well with the dismal science so Powell may be favored - he is considered a moderate in the footsteps of Janet Yellen.  

The third quarter Employment Cost Index revealed compensation costs for civilian workers increased 0.7%, seasonally adjusted, on the heels of a 0.5% increase for the second quarter. Wages and salaries, which make up about 70% of compensation costs, increased 0.7% while benefits, which make up the remaining portion, jumped 0.8%. The key takeaway, then, is that there was a slight pickup in compensation costs, but not enough to trigger any undue inflation alarm. The Oct consumer confidence index at a 17yr high. Jobs and income are the keys to October's report. The assessment of October's jobs market is unusually favorable with only 17.5% of the sample saying jobs are hard to get, which is very low and down 1/2 percentage point from September. This reading will firm expectations for strength in Friday's employment report. Another positive is confidence in the outlook for the jobs market where pessimists are making up an increasingly smaller share, at only 11.8%.

Overall the bond and mortgage markets remain bearish, as interest rates, even with the slight increase, have remained well trapped in their narrow ranges. Still stock markets control the bond market - as long as stocks move higher there is less desire to hold bonds that are not close to matching stock market gains. There are no inflation increases in sight, allowing hedging in treasuries against the potential of a major market correction that so far defies gravity. Any significant move to lower rates depends on stocks in the US and globally as well as little inflation fears.  Other than that and notwithstanding some kind of Black Swan event the outlook for interest rates is bearish.

In summary, I did mentioned yesterday that pricing did not yet reflect the recent gains we have seen, so I did mention that if you float, do so with caution.  Hold and behold, it did improve despite remarkably flat bond markets and some upbeat economic data.  The $20 question is whether today's lack of movement is the end of our rally or a pause in it.  Pigs Get Fat, and Hogs Get Slaughtered.