Tuesday - June 17, 2014, 10:15am ET

Current Trend Direction: Sideways

Float/Lock Bias: Cautiously Floating

Current Price of FNMA 3.5% Bond: $101.75, -34bp

Economics 101. Higher Inflation leads to higher rates. And this morning the Bond Markets are behaving poorly in response to a surprisingly hot inflation reading.

The May Consumer Price Index (CPI) rose by 0.4% versus the 0.3% expected, led higher by climbing costs for electricity, gasoline and food and hit the highest monthly rate since September 2012. The Core rate, which strips out volatile food and energy, rose by 0.3% versus the 0.2% expected. The year-over-year headline CPI rose to 2.1% - a year ago the rate was 1%. The Core hit 2%, its highest level since February 2013 and at the upper end of the Feds comfort zone for both CPI and Core CPI.

It will be very interesting to see what the Fed says Wednesday about this inflation reading. Is it a one off reading or the start of a trend. The 0.3% monthly core reading is 3.6% annualizedthats double and more of what inflation has been running at for years.

Housing Starts fell 6.5% in May to an annual rate of 1.001M when estimates called for 1.028M. Building Permits, a sign of future construction, declined by 6.4% to an annual rate of 991K versus the 1.050M expected. The housing market continues to cool after the torrid pace in 2013.

The Feds 2-day FOMC meeting kicks off today and there will be no headlines until tomorrow afternoon at 2:00pm ET when the monetary policy statement is released. More on the subject tomorrow.

While expecting Q1 GDP growth to be revised down to an annualized rate of -2% from the current -1%, expect the Fed to keep tapering on autopilot and reduce it by another $10 billion to $35 billion/month at the conclusion of the June 17-18 meeting. Markets will now be laser-focused on how and more importantly when the Federal Reserve plans toengineer the first increase in short-term rates since 7/06.

Technically, the 3.5% coupon just fell below support at the 50-day Moving Average not cool. However, there is some nearby support at the recent sideways trendthis can be seen on the chart.

We would like to float with the intention of getting to the Fed Meeting if the market allows us to do so.

Joe Shamie NMLS # 241432

First Choice Loan Services NMLS # 210764

First Choice Bank NMLS# 177877

866-970-3400 x-5135

jshamie@fcbmtg.com