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Stocks are attempting to rebound this morning after a big selloff yesterday, but they are already giving back some of their earlier gains. The stock market will be something important to keep a close eye on, because as we have seen in the past, if there is too much instability, the Fed could step in even ahead of September 18.
A big reason for the Stock market correction is the unwinding of the carry trade – A carry trade is an investing strategy where you borrow at a low cost in one currency to achieve higher returns from investments in another currency. One of the most recent examples has been to borrow Japanese Yen, expecting the currency to remain cheap against the U.S. dollar and for Japanese interest rates to remain low. With Japan recently hiking rates, and the Fed expected to cut rates here, those doing the carry trade are coming under pressure and losses. There are also margin calls taking place, so traders are forced to unwind the trade, selling assets in dollars and paying off their borrowed yen.
Our good friend, Peter Boockvar, spoke to a strategist at JPM who thinks the Yen carry trade unwind is about half done…meaning there could be a lot more selling and volatility in store.
The NASDAQ chart reminds us of the early 2000’s, when we had the dot com bubble. While history does not always repeat itself, it often rhymes, as Mark Twain once said. Looking at a chart in March 2000, we saw a double top that resulted in a 36% decline in Stock prices over a three week period alone. We are not saying that this is going to happen, but it could, as we are seeing similar patterns. One bit of silver lining – When this happened in the past, the 10-year yield moved sharply lower as a result. That means that while Stock prices may have more weakness ahead, yields and Mortgage Rates should fall.
San Francisco Fed President Mary Daly
SF Fed President and Voting member, Mary Daly, spoke yesterday and acknowledged the weakness in the Labor Market after last Friday’s BLS Jobs Report. She said, “From my mind, we’ve now confirmed that the labor market is slowing and it’s extremely important that we not let it slow so much that it turns itself into a downturn.”
Bottom line – she seems like she is in favor of a 50bp cut at the September 18 meeting. The Fed Futures, which is the market betting line on what the Fed will do, is pricing in a 76% chance of a 50bp cut at their next meeting.
CoreLogic Home Price Insights / Black Knight Home Price Index
CoreLogic reported that home prices rose 0.3% in June after rising 0.6% in May, 1.1% in April and 1.2% in March. Appreciation gains are beginning to slow, but they have been strong. CoreLogic forecasted that it would rise by 0.7%, so while a decent monthly reading, it was below their estimate.
Year over year, home prices are now up 4.7%, which is down from 4.9% in the previous report, due to a higher gain last year that was replaced.
CoreLogic forecasts that in July home prices will rise 0.3% and anticipates that home prices will rise 2.3% over the next year, which is likely conservative.
Black Knight also reported their home price index, showing home values rose 0.23% in June and are now up 4.1% year over year, down from 4.7% in the previous report. Again, remember that the year over year number declined because of a very high comp from last year.
In the past we have talked about pent up demand from individuals living home with their parents who will eventually move out to buy or rent a home. Currently, the share of people age 25-35 living home with their parents is 17%, the highest level since 1940! We brought this up back in 2010 when the share was at 15%, and it accurately portended more demand and a strong housing market. We feel this is a good indicator that when rates continue to fall, there will be a ton of pent up demand, which will create more activity and likely drive home prices higher.
Technical Analysis
Yesterday, Mortgage Bonds started the day higher, getting up to 101.18, before reversing lower. After floating for over a month and benefiting from over a 225bp rally in Mortgage Bonds, we issued an alert to preserve those gains.
Mortgage Bonds have begun to break beneath support at 100.61, which is a negative technical sign, as there is a lot of room to the downside before reaching support at 99.91.As we mentioned last week, things are starting to turn in our favor for Mortgage Rates, but they will not go down in a straight line. We have made good progress, but it’s only natural to see some pullbacks.
The 10-year is trading at 3.86% after getting as low 3.68% yesterday. Yields are in a very wide range and are susceptible to whipsaws, so we must remain on guard. Support is down at 3.66%, while resistance is up at 3.92%.
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