Mortgage Rates Still Hedging Upward

Mortgage rates are moving sideways but still hedging toward the high side as it has been for the past several weeks.  Yesterday we saw MBS worsened by 25 BPS and so far today at 11:00AM, we have lost 7BPS.  The 10yr is holding steady at 2.41% after the reports this morning.

The April Producer Price Index (PPI) was much higher than expected. The Headline MOM reading was more than double market expectations (0.5% vs est. of 0.2%) and is now at 2.5% on a YOY basis which is much higher than the consensus estimates of 2.2%. When you look at the Core (ex-food and energy), the MOM reading came in at 0.4% vs est. of 0.2% and YOY it was 1.9% vs est. of 1.7%. The YOY reading is the highest since January 2015.

Initial Weekly Jobless Claims came in close to expectations and the more closely watched 4-week moving average down to 243,500 which is very low. Continuing Claims were also lower than expected (1.918M vs est. of 1.980M) which is the lowest level in over 10 Years.

In Great Britain, the Bank of England kept their key interest rate at 0.25% and left the pace of their asset purchase program the same. The vote was 7-1 which was basically in line with market expectations with a few hedging for a 6-2 vote. During his live press conference, B of E President Carney said he has raised his inflation/growth expectations for the full year and that their current stimulus plan is adequate.

The recent decline in crude prices ended yesterday with a bang. US crude inventories were down 5 million barrels, the largest drop in inventories over the last year. Also, the Saudis cut supplies of crude to Asia more than expected. The increase in oil prices yesterday and this morning have resurrected the belief that OPEC’s production cuts are beginning to take effect. I still believe that oil prices have little upside, increasing prices will add the US increases in output. OPEC members will not sit still either if the price escalates too much members will use the increase to begin cheating on their pledges.

The Comey firing is increasing the view that those stimuli programs may be further delayed with Congress in a lather over Trump/Russia relationship, if any. Anything that will derail Trump and Republicans is ammo for Democrats, and within the Republican ranks, it further complicates the deep divisions in the party. Yesterday I commented that this issue would not have any market impact - maybe spoke too soon, if all the programs markets have been betting on becoming bogged down the equity markets may suffer.

Mortgage rate volatility is average again today. However, for the last four days we have seen mortgage rates inch up with very little volatility. We expect the same today, short of a big geopolitical even or an epic fail in the 30 yr bond auction this afternoon.