Mortgage Rates Moving Sideways to Slightly Higher

Mortgage rates are moving sideways to slightly higher so far today.  Yesterday we had no follow through with the previous days improvement, and with the data that we received this morning, the market is trying to position itself for what is to come. 

ADP delivered another surprise on job growth in May; expected job gains were +180K, as reported up 253K. The deviation in job growth and forecasts is not reliable, never has been. The better gains will likely translate to traders increasing their estimates for tomorrow’s BLS report; before this morning, estimates were 185K non-farm payrolls up 185K and private job growth 172K. ADP saying 78% of the growth was in small and medium size business, 22% in large businesses; service jobs +205K, goods producing jobs +48K. The reaction in the bond and mortgage markets did lower prices but not in any major way, but selling has increased. ADP has been hitting and missing this year, making remarkably good calls for oversized strength in January and February followed by a bad call for a third month of strength in March, a month that came up well short. ADP's call for April was respectably accurate, at 177,000 (now revised to 174,000) vs actual private payroll growth of 194,000.

Initial Weekly Jobless Claims were a little higher than expected but still at a very low level (248K vs est of 235K). The more closely watched 4-week moving average is still below 240K (238,000). This report falls outside of tomorrow's job's data period.

Manufacturing: ISM Manufacturing for May was very strong reading that beat out estimates. It is the third best reading this year.  Construction Spending, at first glance, looks disappointing, but the miss was because of a major revision in the prior month so it balanced out.

We are going to see May auto and truck sales being released throughout the day.

More of Fed rhetoric (as I like to say) - as S.F. Fed President John Williams (non-voting member) said last night that he sees a total of three interest rate increases for this year as his baseline scenario, but views four hikes as also being appropriate if the U.S. economy gets an unexpected boost. Fed Governor Jerome Powell (voting member) said that "If the economy performs about as expected, I would view it as appropriate to continue to gradually raise rates."

At 11:00AM, the 10yr is up to 2.23% and the MBSs are slightly negative.  I am still bullish on rates, as the technicals remain bullish. Tomorrow’s employment data will keep prices lower throughout today. May employment is one of last significant economic reports until the FOMC meeting two weeks from now. It will take a big miss in tomorrow's Average Hourly Wage data for MBS to be able to break out above our current trading channel (lower mortgage rates) and based upon all the jobs related data that we have seen so far, that does not seem to be very probable.