Mortgage Rates Flat Before FOMC's Announcement

Mortgage rates are flat today after we saw improvements in the bonds and mortgage markets yesterday.  Early this morning we had MBA report about mortgage applications as we saw a turn in purchase applications increase after a two-week downturn, while refinance applications went down.

At 7:15AM, we got the ADP report and for the first time in the last several months, the report came in very close to expectations, while the revision in March was negligible. There was little initial reaction to the report, but after 20 minutes MBS prices slipped to the negative side.

April ISM services sector index hit it’s second best reading since October 2015. The employment component essentially unchanged from March but the new orders index jumped significantly higher. The reaction initially was not much, but the better serving sector will help the economic bulls and keep interest rates from improving today. The service sector accounts for about 70% of the economy.

Yesterday, I failed to mention the economic outlook with auto sales as their numbers in April were weaker than thought, adding more questions about the trump economic boom that has driven stocks higher here and globally. Q1 advance GDP released last week was the weakest in three years at +0.7%. The initial reaction to the soft Q1 growth was, Q1 has always been weak and some are questioning the way the Commerce Dept. calculates its data. Now, however, an increasing fear that the economic outlook is too high with more economists beginning to re-think their forecasts. Investment managers are tempering their optimism, with 44% saying in a Northern Trust survey taken in late March that they expect the economy to accelerate over the next six months, down from 55% in the previous quarter.

The current sentiment change on growth that is increasing brings the Fed policy decision this afternoon in more focus. There is no rate increase coming today, but currently markets are focusing on an increase in June with 70% odds being bet in the Federal Funds futures markets that the June FOMC meeting will result in a 0.25% increase in the Federal Funds rate. In the WSJ this morning, Lacy Hunt was talking about the slow growth in M2 money supply slowing down. M2 is an indicator of overall demand - it has grown at a below-average annual rate of 5.5% over the three months that ended in mid-April, down from 6.8% in 2016. M2’s pace tends to rise and fall with demand for goods and services. Together with decelerating credit growth, tightening lending standards and a rising fed funds rate, slowing money growth and velocity suggests softer economic growth ahead according to history and Lacy Hunt. “We’re headed for a severe slowdown, and the risk of an accident is high,” he said. Hopefully, he is well off the mark, but there may be some truth here - the economy is not likely to grow at the pace investors have bet. One of the proofs is the stable US long end of the yield curve, 10yrs and 30yrs are not increasing as one might expect with that glowing economic forecast now cooling somewhat.

This afternoon the FOMC policy statement at 1:00PM. No rate increase but we will find out what the Fed is thinking now. Markets, as noted above, are presently believing the Fed will move rates higher at the June meeting, but I am leaning the other way as I do not feel that it would.  With that, lock in these rates if closing for the next 30 days as I never been a strong believer with floating the first week of the month.