Mortgage Rates Weaker This Morning Following Friday's Movement

This morning we have opened weaker in both the bond and mortgage markets after Friday’s strong rally that took the 10yr down to a low of 2.15% with MBSs following suit.

The May employment data last Friday roiled bond markets with weaker job growth and lower revisions in April and March. Stock indexes on Friday did improve, while rates declined on increasing evidence that inflation is not accelerating and expected to lessen somewhat. The long end of the yield curve is very sensitive to any expectations of increasing inflation. In the EU, ECB’s Mario Draghi last week was quite sanguine on inflation outlook, saying the bank remains concerned; EU inflation is not rising as he and our Fed want to see. Next Wednesday, the Federal Reserve’s FOMC will increase the Federal Funds rate as is widely expected.

Higher short-term rates reflect markets’ belief that next Wednesday the Fed will move the Federal Funds rate up 0.25%. It would be a huge surprise and a market shock if the Fed did not act. The focus will not be as much on the anticipated move but on what the policy statement and Janet Yellen have to say regarding future increases. Until recently many believed the Fed would move again at its September meeting, but with recent inflation reads dipping, the weaker employment reports from March through May and comments from the ECB, another hike is currently being re-thought. Also, next Wednesday the Fed will release its 2-year forecasts for employment, GDP, and inflation.

This morning, Q1 final productivity improved from the preliminary report at -0.6% to 0.0%, with the unit labor costs on the preliminary +3.0%, the final 2.2%.  Later, we got the more watched May ISM services sector index, but this number fell short of expectations.

There are no economic reports of consequence through the rest of this week - all of it was this morning. On Thursday, Ex-FBI director Comey is scheduled to testify in the Senate. Markets may be a little nervous over his testimony this week with little economic data and next week’s FOMC meeting. On Wednesday, the director of national intelligence, Dan Coats, and the director of the National Security Agency, Adm. Mike Rogers, will appear before the Senate Intelligence Committee. Comey on Thursday is thought to tell the Committee Trump asked him to back off an investigation of former national-security adviser Michael Flynn.