We will maintain our locking bias

Stock are trading near unchanged levels, as investors digest the slew of economic reports received this morning.  The second look at 1st quarter Gross Domestic Product (GDP) showed significantly higher growth than the initial first look… GDP was revised higher from 0.7% to 1.2%. This was even stronger than initial expectations of 0.9%. The primary drivers behind this strong report were personal spending and increased gross private investments. Given the strength of Consumer Confidence during this time, it makes sense to see an uptick in the amount of spending and investments made by US citizens. However, it now appears that estimates for Q2 are heading lower. With Healthcare Reform and tax reform facing significant headwinds, consumers are not quite as willing to spend in anticipation of the personal financial gains they’d experience if both were to pass. Therefore, a slower than expected growth rate is understandable.

Next week will bring important economic news, highlighted by the Bureau of Labor Statistics (BLS) report on new job creations in the month of May. That potential market moving report will happen on Friday, and the Fed’s favorite gauge of inflation (PCE) will be reported on Tuesday. Given the significance of these two reports, we could see mortgage bonds be forced out of their current channel in one way or the other. With the ceiling of resistance not too far above current levels holding in place since the bond market fell last November, the more likely of the two scenarios will be to see bonds break to the downside when a breakout does happen. That would push mortgage interest rates higher. However, improvements in the bond market may still happen. With all the political chatter, anything is possible.

Given the strength of the ceiling overhead, we will maintain our locking bias.