The Week in Preview

Today: Slight improvement in rates vs yesterday. I still hold the following position, The Fed kept rates too low for too long. Now they are going to, and they said they are going to, keep rates higher for longer.

Recommendation is to lok rate, protect as soon as the purchase deal is ready.

This week: The Fed Chair indicates likely to lift rates in coming months. More housing starts for future supply. Inflation still stubbornly high.

 The Fed: Federal Reserve Chair Jerome Powell said the central bank didn’t raise interest rates last week as it wanted to slow down its historically rapid pace of increases, but stressed it would likely lift rates again in coming months. –The Wall Street Journal

The decision to hold rates steady, after 10 consecutive increases, was designed “to give ourselves more time—to stretch out the time for making these decisions.”

More Houses: US housing starts unexpectedly surged in May by the most since 2016 and applications to build increased, suggesting residential construction is on track to help fuel economic growth. –Bloomberg

Beginning home construction jumped 21.7% to a 1.63 million annualized rate, the fastest pace in more than a year.

Inflation: Let's refresh our understanding of the rate landscape first. The bond market (which drives interest rate movement) has been broadly sideways recently as investors wait to see how quickly inflation(bonds' biggest concern) is subsiding. That "wait and see" approach prompted the Fed to hold its policy rate steady at last week's meeting, but that was widely expected by the bond market and thus not worth much of a reaction. Interestingly enough, the additional hikes are not seen happening in response to some additional upward momentum in inflation or economic growth. Rather, the Fed's baseline expectations call for continued cooling in the labor market, modest economic growth, and continued cooling in inflation.

In other words, inflation and the economy have a very low bar to justify a few more rate hikes. Things would have to deteriorate pretty abruptly for the Fed to abstain.

Moreover, if things improve a bit better than expected, we could be looking at more than 2 additional hikes. – MBS Live, Matt Graham

Next Week:  Early in the week there is a lot of Treasury supply. Supply tends to raise rates.

Treasury Note auctions on Monday, Tuesday and Wednesday.

Fed Speakers continue to be on the calendar.

Core PCE inflation ( a Fed measure) forecast to remain elevated when reported on Friday.