Mortgage Rates Quiet as 10yr Is Moving Yield Lower

Mortgage rates are not making much of a noise this morning as the advance Q2 GDP was expected to grow 2.6% and was reported at 2.6%.  Revision to 2016 from 1.6% to 1.5%. Additional evidence that inflation is not on any radar presently, although the Fed continues to believe it is just around the corner. Real consumer spending estimates were +2.8%, as reported +2.8%. Business investment, at 5.2%, was once again very strong and offset a bounce lower for residential investment, which fell at a 6.8% rate. Inventories were slightly negative for the quarter, while net exports improved and proved a slight positive.

We also got Q2 employment cost index, which was thought to be +0.6%, as released +0.5%; yr./yr. Employment costs at 2.4% were unchanged from Q1. Q1 employment costs were +0.8%. Another indication that so far, the Fed’s belief that low unemployment would increase wages has not happened yet. Two out of two misses this morning on Fed expectations.

Although on balance these two data points should be a plus for the bond market, there was no initial reaction to the data, but has improved now at 11:00AM as the 10yr stands at 2.30% down from the start of 2.33%.  MBSs are trading even.

Yesterday, the dollar index increased for once +0.53 to 93.93 - this morning back to dollar weakness. The dollar continues to fall, generally not a good thing for the economy overall, but is assisting in increasing exports somewhat. Not a positive for foreign investments into US assets if the outlook remains as negative for the dollar as it is currently.

The final data this week was the final July U. of Michigan consumer sentiment index expected unchanged from mid-month edged higher the last two weeks.  Still, the result is noticeably lower from June's 95.1 and reflects weakening in expectations, down 3.4 points to 80.5. That contrasts with strengthening in the current assessment, up nearly 1 point to 113.4. The report warns that this divergence hints at a shift lower for current conditions and the total index in the months ahead. Inflation expectations remain very subdued, at 2.6% for both the 1-year and 5-year outlooks.

The Senate had an all-nighter, with the vote to pass a health care bill failed - 49 for, 51 against. The outcome may spell doom for the party's seven-year quest to gut a 2010 law that was Democratic former President Barack Obama's signature domestic policy achievement, but we think the fight will go on in some way. The bill was a shell of what was intended, yet still failed. The failure leaves Obamacare intact. It would have retroactively repealed Obamacare's penalty on individuals who do not obtain health insurance, repealed for eight years a penalty on certain businesses that do not provide employees with insurance and repealed a tax on medical devices until 2020. The nonpartisan Congressional Budget Office estimated that if it became law, 15 million fewer Americans would be insured in 2018 than under existing law. Is it over? Up next, tax reform, also a huge question mark even though you may hear differently from media sources.

With the economic data today coming in at expectations, I do not expect mortgage rate volatility to be up any more than it is heading into the weekend.  Let’s watch the 10yr to see if it breaks where it is now towards 2.28%.