Mortgage Rates Hardly Moved - Are They Going to Go Lower?

Mortgage rates hardly moved today, even though there was a little negative push towards the end of the day.  The next couple of sessions should set up a longer term move on the bond and mortgage markets. The bellwether 10yr note yield closed the same as it did yesterday at 2.21%, which is not far off the low for 2017 which was at 2.17%. If the 10yr breaks 2.17%, most of us feel that the yield would fall to the day when Trump won, which was at 1.80%.  Am I dreaming?  I know that is a tall order, but this should not be dismissed. 

Inflation is low.  The economy, for all the media and guest appearances on CNBC, Bloomberg and Fox - that good times and increased growth is highly likely - and that inflation is increasing - all talking up their long equity market positions. You cannot totally ignore some of the data but consumer spending since the beginning of the year has been week.  And inflation expectations are lessening now with crude oil likely to drop to the low $40s taking other commodities lower with it. And those bets on tax cuts, fiscal spending and deregulation are dashed on the rocks this year. May auto sales out tomorrow and that is expected to see another decline in sales.  

We cannot get too bullish now. If tomorrow’s May ADP jobs, expected at +180K does not meet forecasts and Friday’s May employment data weaker than the present enthusiasm that will be enough to crack stocks and propel the mortgage rates down 0.25 points. All of that is a lot of IFs - but since the beginning of May interest rates at the long end have been easing lower – but at a snail’s pace. Let’s also not forget the geo-political situation with N. Korea and now the pot that Trump stirred up in Europe over NATO and climate change. The housing sector, still holding but recent data hasn’t been strong, auto and truck sales slowing. The Trump/Russia investigation is just getting started, although many opposition party members and most of the media have already cast their ballots that Trump and/or his people are deeply involved with Russia. Not bad on the surface, depends on what kind. 

In two weeks, nearly everyone out there is expecting the Feds will increase rates.  If it does not happen, it will be on the back of very weak job growth and auto sales. The result will of no increase will be close to another Taper Tantrum we had in 2015 when Bernanke ended some of the QEs.  

Sounds like what I set out above that I am bearish on the economic outlook and bullish for lower rates.  I do a lot of reading and follow some very good economists who can read the market extremely well.  What markets are reflecting now is increasing skepticism, but not giving up – as there are many positives to also consider and would drive rates higher. 

In summary, bonds have had a nice run the past 3 weeks, and MBS have improved quite a bit.  Current pricing is close to about as good as we have seen the past 7 months, and there appear to be limited inflation concerns.  With that being said, month end buying is likely responsible for a portion of this week's gains, and that changes tomorrow.  Friday's Jobs Situation report for May employment adds another dose of drama.  If you float past today, be aware that pricing may suffer later this week.  The trend, such as it is, remains our friend for the moment, but it's more of a trickle than a flood towards lower rates.