Recap
Yesterday bonds sold off in the afternoon after President Trump broke the news that the U.S. will be the "guardian" of the Strait of Hormuz, and will impose fees “at the rate of 20% on all cargo shipped.” Trump also said the U.S. will reimpose the blockade against Iran's ships, and continue attacks. Oil prices jumped and bonds sold off, leading most lenders to reprice worse and making it likely that we will see higher mortgage rates coming.
Rate outlook for today...
Rate sheets today got a temporary reprieve as bonds rallied early on prepared testimony from Fed Chair Kevin Warsh to Congress and the first taste of actual deflation (not disinflation) in six years. The CPI inflation data came in even lower than anticipated for June, a reflection of the drop in oil and gas prices after a deal with Iran had been reached. After yesterday's comments from Trump, Fed futures were betting on over 40% chance of a Fed rate hike at this month's meeting... a big change in the outlook. This morning, after the inflation data, now back down to a 12% chance.
I think this is definitely an overreaction, since the deal with Iran has fallen apart and oil is back rising steadily. It's kind of short sighted to pretend that June's inflation numbers could continue in the face of all that. I think markets will whipsaw and today's improvement will be a memory soon enough. As it is, it still only wipes out yesterday's losses, and doesn't really make much of a dent in the bigger picture.
Reprice risk today is moderate, markets may at some point come to the same conclusion I have, and we could see bonds lose ground again.
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