Mortgage Rates Mixed Starting Off Employment Week

Mortgage rates were mixed today following Friday's wild action in the bond market, which started with the Flynn/Russia news in the morning.  As for the forces underlying the pull-back in bonds, the Senate's passage of its tax bill likely played the biggest role in putting upward pressure on rates.  That was a bigger factor earlier in the morning, however, as bonds were able to recapture most of those losses by the end of the day.  The net effect is a bond market that justifies slightly better rates than were seeing this afternoon.  The catch is that volatility is an ongoing risk this week.

Investors continue to pile into the 30 large cap stocks but the broad market not moving as much. This morning the DJIA up 227 on the open, NASDAQ and S&P better just riding along in sympathy with big caps. Economic activity is increasing with the icing on the cake the coming tax cuts that are widely thought to increase wages and consumer spending.

The Senate passed its ideas on Saturday, Republicans in the Senate though want to cut sharply the value of business tax credits used to encourage research and development and other investment spending, sparking protests from the technology industry. Costs of the cuts now about $1.4 trillion with more fiscally prudent senators increasing their concern that at the end of the day the tax cuts being considered will increase the budget deficit and will not be revenue neutral as is being advertised. I agree, as these cuts are likely to help the economic outlook in the near term, but I doubt that increased revenue will not equal the government spending thus pushing the US debt to levels hard to square. That is then, this is now and the political climate in Washington over the last 10 years is ‘don’t worry, be happy’, pushing the inevitable down the road. 

There is a lot of discussion regarding the costs against the anticipated increase in tax revenues. It is a quantum leap, one that did work back in the ‘80s but that crystal ball may be somewhat tarnished these days. The government entitlements are on the increase and will continue to grow, especially as baby boomers moving to social security,

Meanwhile, the economic outlook has been improving, consumers appear to be wanting to spend a little more, confidence expressed by the Conference Board’s confidence index and the U. of Michigan consumer sentiment index. Tomorrow the Nov ISM services sector index that makes up most of the economy is expected at 59.1 from 60.1. Recent releases of both the ISM manufacturing index and the services sector have exceeded forecasts, one point that has propelled equity markets.

In summary, the bond and mortgage markets remain well tethered in their respective tight ranges. Prices this afternoon for MBSs were better than this morning as the stock indexes swoon into the close. The DJIA is entering the stratosphere on very excessive overdone enthusiasm. I am not opposed to tax cuts, it will help me, but the betting that the economy will grow to validate the over-valued indexes is a Trojan Horse. There are arguments out there that ignore that stocks in generally over-valued, those are offered up by investors and analysts talking up their positions.