Mortgage Rates Trending Lower - 10yr Testing 2.28%

Mortgage rates are looking to improve thus far as we have seen a very encouraging start this morning in the bond and mortgage markets.  Currently at 10:45AM, the 10yr is at 2.27% and the MBS pricing is at +20BPS.  This is another test of the 10yr at the 2.28% resistance I have been talking about recently.

This morning we had the June import and export prices report with import prices coming in as expected.  However, YOY Import Prices are up 1.5%, but that is a significant reduction over last month's pace of 2.3%.  Since we import so much into our country, this is very anti-inflationary.

July NAHB housing market index had a slight miss and a pull-back from last month’s historical highs, but still a strong number. There has been little reaction to the weakness so far.

Weakness in oil prices is a wildcard right now for the inflation outlook. Core readings have so far resisted the negative spillover from this year's fall in oil prices, but continued weakness could begin to pull overall prices down with them. The lack of inflation is, in fact, the biggest threat right now to Federal Reserve policy. That said, there are reports this morning from the Saudis that it is considering cutting output by 1 million barrels a day. Crude this morning is higher as a result. Overall, there is no inflation in prices from imports or exports, more frustration for the Fed.

Some support this morning in the bond market as the Republicans have now tossed in the towel on its health care bill; not enough Republican Senators willing to vote for the bill. GOP Sens. Mike Lee of Utah and Jerry Moran of Kansas on Monday night became the third and fourth Republicans to oppose the latest version of the GOP bill, which would roll back and replace much of the Affordable Care Act. Senate Majority Leader Mitch McConnell saying, “Regretfully, it is now apparent that the effort to repeal and immediately replace the failure of Obamacare will not be successful.”

This is a huge deal that Republicans cannot get a health care law passed. It now becomes a high hurdle for tax cuts and infrastructure spending. The health care legislation was key to tax cuts with the ‘savings’ the new bill would have added to offset some of the tax cuts. The plan now is to vote to repeal the Obamacare health bill then try again to get a new bill hoping that some Democrats might join in. Given the gridlock, it would be surprised if Republicans can get any Democrats to help. Repealing the Obamacare bill with nothing to replace it will not sit well with many voters. Comments from some news media this morning, that now a tax cut becomes more likely.

No inflation on the horizon. This morning’s June import and export prices adding to the idea that inflation is not a threat and that Janet Yellen’s ‘transitory’ definition is suspect. Crude oil is increasing recently - Yellen has commented that oil price declines are also ‘transitory.’

The failure of the healthcare bill and the prospects of a tax cut dwindling are pushing markets lower which is positive for mortgage rates.  Look for moderate volatility throughout the day while the markets flushes out what this means for the economy. Just from a technical standpoint, can the 10yr break the 2.28% resistant level?  This will help for the hope of lower rates.