Mortgage Rates Fall - Feds Raised Rates

Mortgage rates fell convincingly today, as these gains came early with this morning's economic data coming in much weaker than expected.  Markets were especially sensitive to the Consumer Price Index (an inflation report) which showed core annual inflation at 1.7% versus a median forecast of 1.9%.

The Fed did what was widely expected, increased the federal funds rate by 0.25% to a range of 1% to 1.25%. As is the usually the case, the analysis is running wild from economists. The policy statement was more data than normal, the question of course is, is the Fed on track with reality? It is the Fed, so few are willing to step out and argue with it, especially with the optimistic outlook presented. Currently, the Fed expects another increase this year, three next year and three more in 2019.  Be careful here, that may be the reality over time, but I do not believe the Fed or any other analytic body can look out three years with any degree of confidence – just look at their track record - more wishful thinking.

The Fed also revised the Policy Normalization Principles and Plans.  It looks now like the Fed will begin decreasing its reinvestment of the principal payments it receives from securities held in the System Open Market Account before the end of the year.

Tomorrow we get more key data to ponder.  OPEC’s output rose 1% to over 32.14 million barrels in May, led primarily by increases from three of its 14 members: Libya, Nigeria, and Iraq, according to the cartel’s closely watched monthly market report. Crude prices dropped to near a seven-month low on Wednesday after U.S. inventory data failed to convince investors that the global oil supply glut is easing. According to the EIA, crude oil stockpiles decreased by 1.7 million barrels in the week ended June 9, falling short of expectations for a 2.6 million-barrel drop from analysts. I guess it’s a broken record, but I do not believe crude prices have much upside.  It is the same old song, there is more oil than demand and no matter OPEC or any other news, oil has little chance of increasing to those forecasts six months ago back to $70.00/barrel. The price, however, does have a stop point, when the price is lower than costs to produce. Today crude dropped to $44.73 -$1.73 today.

In summary, bonds posted robust gains this morning, as weak inflation data demonstrated the US economy faces continuing challenges.  The Fed raised their overnight rate this afternoon, surprising no one.  MBS prices and treasury yields are virtually unchanged post-Fed Statement, a bullish sign for future rates.  The lack of inflation is a definite boon for bonds, and may spark a move to lower rates.  Rates are attractive, but I wonder what the future brings?