Published Date 6/29/2022
In overnight trading the 10 yr. note dropped to 3.12%, down 7 bps from yesterday’s US close, by 8:30 am ET this morning the note increased to 3.17% -2 bp. MBS prices in early trade this morning generally unchanged. The improvement on the 10 yr. note happened in Europe.
Cleveland Fed Pres. Loretta Mester in an interview on CNBC suggested she would favor another 75 bp increase in the FF rate when the FOMC meets on July 27th. She qualified it saying she would monitor inflation and markets until the meeting, but nothing has changed in inflation she would push the 75 bp increase, however if inflation moderates then she would reduce her push to just a 50 bp increase. She wants to see the benchmark lending rate reach 3% to 3.5% this year and “a little bit above 4% next year” to rein in price pressures even if that tips the economy into a recession, adding The US Federal Reserve is “just at the beginning” of raising interest rates to control inflation.
Yet another view; Rob Arnott and Campbell Harvey at Research Affiliates, “The simple fact is recessions are usually created — they don’t happen naturally,” Arnott said in an interview. “Economic expansions don’t die of old age — they’re murdered by the Fed. And we’re seeing that happen again now.” The Federal Reserve was in denial about inflation and moved too slowly in trying to quell rising prices. That’s now put it on a trajectory to create a recession if it hasn’t already done so. Inflation is at a four-decade high and could — averaging out the past 12 months and pulling the figure forward through year-end — finish 2022 at 10.8%. Arnott and Harvey point out that “our current problems are self-inflicted by an extended period of negative real rates.”
Opinions are rampant these days with no consensus, some say no recession, others see inflation lasting for another year. The Fed doesn’t have any more idea of what lies ahead than anyone or any firm out there, what the Fed does know is that inflation must be curtailed, and the only tool is to increase rates to slow the economy and hopefully lower inflation. These are times that try men’s souls. There are no experts in this situation.
Weekly MBA mortgage applications increased from the prior week, up 0.7% after increasing 4.2% the week before. Purchase apps +0.1% from +7.9% the prior week, refinance apps +1.9% from -3.1%. All about slight changes on the 10 yr. note that fell between June 15th and June 23rd.
At 8:30 am the final Q1 GDP was expected at -1.4%, growth was less than expected at GDP -1.6%. Q1 personal consumption expenditures were expected at +3.1% yr./yr., expenditures increased just 1.8%. GDP represents the total value of the country’s production during the period and consists of the purchases of domestically produced goods and services by individuals, businesses, foreigners, and government entities. We are at the end of Q2, will this quarter be another negative, that is yet another debate that is purely speculation with data crunchers at every firm running their own assessments.
The US is ramping up its biggest military expansion in Europe in decades, including a permanent troop presence in Poland, as NATO prepares for two more members to join the alliance in response to Russia’s invasion of Ukraine. “We’re stepping up. We’re proving that NATO is more needed now than it ever has been,” President Biden said Wednesday at the opening of the North Atlantic Treaty Organization summit. More permanent troops and more hardware; the new plans also include sending additional Navy destroyers to Spain, a short-range air defense battery to Italy and two squadrons of cutting-edge F-35 jet fighters to the U.K. Getting more intense as Putin shows no sign and letting up. Putin has tried breaking up the alliances between the US and Europe; NATO to add two new countries, Finland, and Sweden.
Jerome Powell speaking this morning said the US economy is in “strong shape” and the central bank can reduce inflation to 2% while maintaining a solid labor market, even though that task has become more challenging in recent months. “We hope that growth will remain positive,” Powell said during a panel discussion Wednesday during the European Central Bank’s annual policy forum in Sintra, Portugal. Household and business finances are also in solid shape, and “overall the US economy is well positioned to withstand tighter monetary policy.” “The economy is being driven by very different forces. What we don’t know is whether we’ll be going back to something that looks like, or a little bit like, what we had before” As noted hear above, even the Fed has little real understanding of what comes next.
At 9:30 am the DJIA opened +82 after declining 491 yesterday, NASDAQ opened -10 after it fell 343 yesterday, S&P started +5 after -79 yesterday. The 10 yr. note at 9:30 am 3.17% -1 bp. FNMA 4.5 and 5.0 coupons at 9:30 am down 2 bps. The 4.5 coupon +4 bps from 9:30 am yesterday while the 5.0 coupon down 2 bps from 9:30 am yesterday.
Source: TBWS
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