Tuesday, September 1, 2015 - Article by: Bart Castelli - Homestar Financial Corporation NMLS #70864 -
Mortgage rates did not move much today after yesterday's late afternoon downturn in the MBS markets. US stock market ripped again today. Questions abound as to why, the answer is not simple but if you want a simple answer, the US stock was exceptionally overbought. In 2014 it was up, up and away for stocks while the economic outlook, although still growing is not growing at the pace equity market valuations were reflecting. A lot of foreign money flooded into the US equity markets, not to mention the domestic mania. At some point it had to do what it is doing now. I warned six weeks ago this was coming, and we know most savvy traders and investors were expecting it. However you do not jump off a moving train until it is about to re-rail. Most investment managing firms could not move too soon or they would experience massive withdrawals; besides where would investors go? China's moves finally took the train off the track.
The bond and mortgage markets were better today on the massive equity market selling, however since last Friday there has been hardly any change in treasury prices and rates. MBS prices since last Friday up just 11BPS this afternoon. Money is not rotating, it is outing stocks and moving into cash. No reason to move from stocks to bonds; doing so in this kind of volatility and with no benefit to earn anything in treasuries, going to cash is the best move now. The last few days for the bellwether 10yr note.
This morning's ISM manufacturing index and it's interior components added to today's selling of equities. Tomorrow markets begin to look toward Friday's employment report with the release by ADP of its private jobs report, expected at +210K from 185K new jobs. Also tomorrow Q2 revisions to productivity and unit labor costs, the Fed Beige Book and July factory orders.
Although MBS prices did improve nicely today, we still do not want to float. Still way too much volatility to expose ourselves. The technicals holding bullish bias on the 10yr and MBSs, however this is one of those times to remain side-lined and not float. I cannot predict with any degree of accuracy what will happen tomorrow, or for that matter what will happen through the trading sessions. All markets, not just the equity market and bond market, are experiencing huge volatility.
In summary, mortgage bonds have been able to hold on to the lower end of the channel I have written about before. As long as we hold this level, floating does come with some risk being that Friday brings with it the NFP numbers. My gut is still telling me to lock and not worry about what the risk can do to one stomach.
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