Mortgage Rates Slightly Higher

Mortgage rates were either flat or slightly higher, depending on which bank you were looking at.  Movement in underlying bond markets suggested a modest increase in rates, but it came too late in the day for most banks to respond with a mid-day rate change. 

There was nothing in the news today of any importance that I did not mention this morning, except the Treasury auction, of which was causing a stir when I was preparing my report this morning.  The Treasury auctioned $24B of 3yr notes this morning.  The demand was strong and encouraged some buying at the long end, as the MBS prices moved into positive territory in a very illiquid market, the 10yr yield dropped from 2.22% to 2.18%. However, it did not last long - if you blinked you missed it. This afternoon Treasury went back to the well for $20B of 10yr.  The auction was not bad but failed to match the strength of the 3yr this morning.

It is all about the Fed this week with a batch of key data points mixed in for more meat in the soup. Two inflation gauges - tomorrow May PPI expected +0.1% overall and the core (ex food and energy) +0.2%. Wednesday May CPI expected 0.0% overall and +0.2% on the core read. Inflation has been subdued recently but the Fed still is expecting it will move up to its 2.0% target (presently 1.6%).  Inflation has run below 2 percent for most of the period since the financial crisis, reflecting generally soft economic conditions as well as transitory factors such as the earlier declines in energy prices. But over the past two years, inflation has moved gradually closer to our objective. Prices rose 1.6 percent over the 12 months ending in April, compared with only 0.2 percent two years earlier.”

More Trump related testimony tomorrow. U.S. Attorney General Jeff Sessions will testify publicly to the Senate Intelligence Committee over his dealings with Russian officials during the campaign and whether he had a role in firing former FBI Director James Comey.  Last week Comey told the Committee Sessions did what he should have, and recused himself from the Trump/Russia investigation. A Justice Department spokeswoman said Sessions requested the open setting because "he believes it is important for the American people to hear the truth directly from him."

Not likely to see any significant movement in the bond markets until at least Wednesday afternoon when the FOMC and Janet Yellen take the stage. By Wednesday afternoon we will have both May PPI and CPI, should add additional debate. What will the Fed do? The FF rate will be increased 0.25%, the outlook for further rate increases is a dart throw now - many believe the Fed will act once again in September while an equal number (ourselves included) are not willing to go that far.  As the policy statement and Janet Yellen will say….it’s data dependent. Presently the market has its doubts and I am included in that mix.  Stocks headed for a big pull back, the other major central banks (ECB, Bank of England, and the Bank of Japan) still stimulating while the Fed going the other way. The economy in my view is OK but not as strong as the equity markets believe now and how strong the economy will be in the future.

In summary, bonds held their ground today, and were slightly higher by midafternoon. It would be nice to lose ground with Wednesday's Fed Policy Statement and Chairwoman Yellen press conference looming, but I doubt we see substantial moves in either direction before then.  It would take an economically bearish Fed Statement to help us rally from here.