Last week, as expected, the Federal Reserve left rates unchanged at 2% after seven consecutive cuts that started in September and ended at the April 30th FOMC meeting. The forward looking statement read "in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high." This phrase along with some others highlighted the Fed's tough talk on inflation, but their lack of action initially pressured the Bond Market lower, before prices rebounded to finish the day just slightly lower. We feel strongly that the Fed has to step in and hike rates in order to strengthen the US Dollar and combat high Oil prices. With high Oil prices and inflation threats looming, it is very tough to see Mortgage Bonds moving much higher from here.

The final Gross Domestic Product (GDP) was released showing a 1.0% increase for the first quarter and was inline line with estimates. Initial Jobless Claims were 384,000, slightly higher than expectations of 375,000. The four-week average of those claims rose to 378,250, the highest since October 2005. Both figures are above levels signal continued weakness in the labor market.

Existing Home Sales for May were reported at 4.9 Million units, which was inline with expectations. The inventory of unsold existing homes dropped slightly to a 10.9 month supply. The report tells us the housing market is weak but stable.

The Federal Jobless Report is due tomorrow, July 3rd. The ADP Employment report

was released this morning, showing a dismal reading of 79,000 jobs lost last month, the biggest loss since November 2002. Job gains reported for May were also revised lower. After adding in an estimated 20,000 government jobs created in a typical month but not included in ADP's read, their report suggests that about 60,000 jobs were lost in June...inline with estimates for tomorrow's official Jobs Report from the Department of Labor. If the news is bad, as expected, mortgage rates should perhaps fall a bit.

Have a happy and safe Independence Day this 4^{th of July!}