Summer has started and things are certainly getting warmer. Down here in South Florida, we have already seen heat indexes into the triple digits. One interesting part of my having two “careers”, is that I also spend time in the south part of the world and just got back from Brasil (again), where it is cool. Well, the mortgage backed securities market seems to like to travel into both spectrums these days as volatility remains, and a few surprises lurk in the shadows.
Last week was certainly an interesting one, with a shocker thrown in for good measure. Throughout the week, we saw mortgage bond pricing trying to break through their 10-day moving average, which held quite nicely and left the end of the corrective move in question. However, despite the beginning of a slow descent last Wednesday and Thursday, the “candles” remained green, showing strength within, a “pilot light” if you will. Well, that pilot light sent off a burning rally on Friday that was driven by a majorly disappointing Jobs Jamboree that I do not think anyone was expecting. The end result was MBS prices breaking not just their 10-day moving average, but soaring through their most recent highs and breaking even a sideways pattern formation in favor of an uptrend. One thing to keep in mind though is that the “rubber band” is still stretched pretty thin and we did not get as solid a correction as we probably needed as well. Looking back over the last week, data continued to show economic improvement, though slowing. It is quite clear that mortgage applications are on the decline, supported only by low interest rates sparking a new demand for refinances. While we saw nice housing numbers, it didn’t take much for people to realize those numbers hide reality of today’s market. We also know that this week holds more longer-term Treasury Auctions, which could weigh on mortgage rates’ ability to remain low as the Treasury Announced them last week.
So what is in store for this week? Can mortgage rates hold their newfound ground, or will they be destined to be pulled back higher as the “rubber band” regains its shape. Well, the week will start off dataless and that means MBS prices will rely on news and technical indications. As the week progresses, Treasury Auctions will play a big role, as will Fedspeak. As the week comes to an end, data will pick up and we will end with a big read on the economy, Retail Sales. This week is another week with data being fairly light, but with some potentials for market moving surprises like last week. Here is the currently listed events…
- Monday: 3-month T0Bill Auction (11:30), 6-month T-Bill Auction (11:30), Consumer Credit (3:00)
- Tuesday: 4-week T-Bill Auction (11:30), 3-year T-Note Auction (1:00)
- Wednesday: MBA Purchase Applications (7:00), Wholesale Trade (10:00), Crude Inventories (10:30), 10-year T-Note Auction (1:00), Beige Book (2:00), Ben Bernanke Speaks (4:00)
- Thursday: International Trade (8:30), Jobless Claims (8:30), 30-year T-Bond Auction (1:00), Money Supply (4:30)
- Friday: Narayana Kocherlakota Speaks, Charles Plosser Speaks (8:20), Retail Sales (8:30), Consumer Sentiment (9:55)
Once again, we see a week lightly filled with data plays, particularly typical market movers. That usually places technical indications in the driver’s seat, though world news adds to the excitement. Any weakness, or even portrayed weakness, shown in the Treasury Auctions could send MBS prices into a tailspin as well. It will certainly be another week to “watch from the sidelines”.
As we look to the charts, we still see the uncertainty and market jitteriness. The charts lack a definitive pattern, which typically means that this last move higher in MBS prices is probably not supported, though it cannot be ruled out completely. We may have more surprises lurking in the shadows, so be careful again this weak and keep in mind that risks certainly continue to outweigh the rewards at these pricing levels. Stochastic indications are again in the overbought spectrum, though still have some room to “grow.” The 100-day moving average has crossed above the 200-day MA with the 50-day close in trail. With MBS prices back above their 10-day MA and hitting new heights, the charts certainly paint a nice picture, but these levels have been tested before and failed intraday, so this may very well be the “rubber band’s” stretching limit.
The bottom line this week is that caution is to be heeded. While things look good, there are some “gotchas” potentially lurking in the shadows. With no definitive pattern as yet, risks still outweigh the rewards and locking is likely the best option, at least for the beginning of the week. Remember that last corrective move may not have been solid enough and that could play out more this week as well. Hold on to your hats, because volatility is likely to continue.
(I have decided to start posting this weekly forecast here starting this week, but I was actaully the first mortgage rate forecast blogger as I have been doing this for many years. This weekly forecast has been posted on Lenderama for over two years alone and I recently started my own radio show at Blog Talk Radio, which is essentially this report but allowing Q & A from anyone whom attends. I expect that show will grow from its current 15 minute broadcast into something at least 1/2 hour, if not longer and will encompass more topics beyond the weekly forecast. I welcome ideas and if anyone is interested in speaking on certain topics, feel free to contact me and I will see what I can do. Also, don't forget to check out my daily forecasts at Florida Mortgage Daily and my newer site, MBS Commentary and Florida Mortgage Report will be back operational again in the near future hitting on a wider variety of topics than before, though its main focus will still be mortgage planning strategies whenever possible and will hit on Money Merge Accounts and other mortgage acceleration programs again.)
