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I spoke last week about important economic information that was coming out in the last six days. Jobs report last Friday, and the inflation data today for May. Neither report was very encouraging, but the markets are taking the information in stride and buying into the theory of “Don’t fight the FED!”

The Federal Reserve has dismissed higher inflation as “transitory” and that prices will fall as the economy recovers and people go back to work. Their statements indicate that everything is related to the supply chain being restricted and that once all the workers go back to work, supply will return and that prices will fall. I’m not so sure everyone believes that, but we all know you can’t fight the FED!

Today the key number was that year over year inflation was 5%. That is the highest year over year number since January 1992. Certainly, well over the FED target of 2% to 2.5%. The market reaction was that it barely moved the needle at all. The 10yr treasury moved a few basis points higher following a really solid bond auction yesterday; and the UMBS 30yr 2.5% coupon fell from 103.67 to 103.58. A move lower, but not all that much for now. Keep in mind if you follow the charts, resistance on improving rates is about 103.75; and declining rates sits where we currently sit at 103.58. A significant push below that level could see a sharp increase in mortgage rates, but I believe the key will be the market believing the FED and the FED continued purchasing on a grand scale.

It might be good to watch the 30yr treasury auction this afternoon and the market response to it; but for now, nobody wants to fight the FED and the Kool-Aid continues to flow until otherwise noted. So as always, if you like it, lock it; if the client wants to gamble, be sure they know it’s all on them.

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