Morning Report: The Fed acknowledges reality in the bond market

Vital Statistics:

	Last	Change	Percent
S&P Futures	2052.1	-11.3	-0.55%
Eurostoxx Index	2805.2	-25.1	-0.89%
Oil (WTI)	47.11	-0.9	-1.87%
LIBOR	0.655	0.002	0.35%
US Dollar Index (DXY)	95.03	0.419	0.44%
10 Year Govt Bond Yield	1.57%	0.00%
Current Coupon Ginnie Mae TBA	106
Current Coupon Fannie Mae TBA	105.1
BankRate 30 Year Fixed Rate Mortgage	3.65

Markets are lower this morning on overseas weakness. Bonds and MBS are flat

The Fed left interest rates unchanged yesterday, and the biggest data point was the dot graph which showed 6 members expect no change in interest rates this year. That sent the 10 year yield down 4 basis points and the 2 year down 5. The actual language of the statement wasn't dramatically different from April. They released new economic forecasts, taking down their estimate for 2016 and 2017 GDP to 2%, and increasing their estimate of 2016 inflation from 1.2% to 1.4%. In the press conference afterward, Janet Yellen acknowledged the upcoming vote in the UK (Brexit) was also a factor. The big admission was that rates will remain lower for longer. 

The Fed Funds futures market is now discounting a single-digit chance of a rate hike in July, and the futures are predicting less than a 50% chance of a move throughout the rest of the year. 

Bond yields are falling worldwide, with the German Bund trading at -2.3 basis points, the Swiss 10 year at -51 basis points, and the Japanese government bond yield at -20 basis points. Like it or not, the US 10 year probably won't be able to escape the low rate vortex in the rest of the world, as investors swap out negative-yielding assets and buy Treasuries. Not saying we are going to go negative, but I find it hard to see where the selling pressure is going to come from. Are we going to be positioned for another refi boom? Don't rule it out. 

The other potential beneficiary of low rates worldwide should be mortgage backed securities, especially GN securities which are guaranteed by the government. I would have to imagine overseas investors will find these appetizing at some point. GN and FN TBAs have lagged the movement in Treasuries so far this month. This should translate into better conforming and government pricing going forward, even if bonds take a breather. 

The other beneficiary of negative interest rates? Gold, which has been on a tear lately. The knock on gold has always been that it has no yield. No yield is better than negative yields, and gold has upside, while there probably isn't much upside in a government bond with a negative yield. A rule of thumb for gold has always been that an ounce of gold should buy a high quality men's suit. 

Initial Jobless Claims rose to 277k last week from 264k the week before. While it looks like payroll growth is slowing, we aren't yet seeing evidence of layoffs. As a rule of thumb, a sub-300k initial jobless print is a sign of strength in the labor market. 

The consumer price index rose 0.2% in May, and is up 1% YOY. Ex-food and energy, it is up 2.2%. Note the Fed doesn't use the CPI, it uses the PCE. 

Real average weekly earnings rose 1.1%. 

Purchase loans are the majority of new originations despite the rally in bonds, according to Ellie Mae's Origination Insight Report. Purchases accounted for 62% of all loans. Days to close increased a day to 45 days and average FICO increased a point to 724.