Mortgage Rates Continue to Increase

Mortgage rates continued their retreat from recent lows for a 2nd straight day after this morning's data suggested the service sector was at its strongest levels in 10 years last month.  The Institute for Supply Management (ISM) is responsible for two of the most important economic reports each month.  The Manufacturing version was out on Monday and was much weaker than expected.  Today's Non-Manufacturing version (hence 'service sector') more than made up for that weakness.

There really is not anything to add to what the media and I have been talking about for the last few days. The July employment report is all markets are concerned with now. This morning Fed governor Jerome Powell added another voice to the recent comments from Lockhart and Bullard, both espousing a rate increase in Sept---next month. Powell essentially said there hasn’t been any decision. The chances of an interest-rate increase next month reached 52% today, up from just 38% just two days earlier; mostly because of comments from Bullard and Lockhart and the surprising jump in the ISM services index this morning. Services are strong but manufacturing is a drag as the strong dollar makes US exports non- competitive.

What can we make of the fact that the Fed appears to want to increase rates while the long end of the bond market appears to say - not so fast. The 10yr note remains stubbornly low with all the recent commentary from Fed officials. Part of it is there is no inflation even through some Fed officials still resist the reality of crashing commodity prices and increasingly weaker demand from Asia and Europe. Short term rates are increasing but not so at the long end - there is still a big bet in the markets that the US economy may not be able to stand even a minor increase in rates. Many economists expect the economy might be able to hold together with just one increase but for that to occur the Fed will have to make it explicitly clear that it will emulate a snail in terms of more increases anytime soon.

Tomorrow weekly jobless claims are expected to be a bit higher than the previous week.  Do not expect much reaction to it, regardless of how claims are reported the data last week is not included in the calculation of July employment by BLS.

Tomorrow likely will be quiet, not expecting much change in the bond and MBS market. Not willing to jump in with an opinion regarding July employment on Friday but as long as the 10yr holds support at 2.30% the bullish bias still stands. I am willing though to take bets that the employment data will not mirror the consensus estimate for job growth - either much stronger or much weaker.

In summary, this morning’s ADP number was not enough to mount a bond market rally. It appears August has been a sell month so far for bonds. That may continue come this week’s NFP report or the tide may shift in favor of lower rates. Either way the risk is too high and locking makes the most sense.