Mortgage Rates Attempt to Rally but Fizzle Out

It was an up and down day yesterday in the rates markets. Mortgage backed securities opened higher in price yesterday and continued to move higher allowing all lenders to reprice for the better. However, around 2pm the tide shifted and MBS gave back all of the early morning gains to close where they had begun. As MBS moved lower, all lenders repriced for the worse with some repricing worse twice.

This morning we received our first report on the week regarding inflation with the Producer Price Index. The PPI measures the monthly change in prices paid by manufactures and wholesalers for the goods they consume to produce their product. If businesses are paying more for the materials they use to produce their widgets, they may be forced to pass along those additional costs to the consumer. During periods of economic stagnation, when unemployment is high, producers find it difficult to pass higher costs along to consumer because demand is already below average. This report gives us two measure on inflation… the overall read and the core read. The core rate strips out food and energy due to their monthly volatility.

The report indicated inflation was much tamer than expected. The overall PPI posted a month over month gain of 0.4% vs expectations of 0.8%. Year over year, overall producer prices edged higher from 4.0% last month to 4.3%. The core rate came in much lower than expected with a month over month decline in producer prices of 0.6% vs a 0.1% increase that was expected. The core rate was led lower by a sizeable drop in car and truck prices.

Our final report on the day was Industrial Production. This data gives Federal Reserve economists a measure of the strength of the national manufacturing sector. It measures output produced by U.S. factories, utilities and mines. Higher industrial production is a positive economic indicator as it implies consumer demand is improving. In that sense, this report tends to benefit the stock market, at the expense of mortgage rates. Economists were calling for Industrial Output to increase at a month over month rate of 0.3%, but the report was worse than expected showing Industrial Production to be unchanged following last month’s 0.2% decline.

Tomorrow we get a another look at inflation with the release of the Consumer Price Index. During periods of economic woes, producers find it difficult to pass along higher prices to the end consumer which makes tracking consumer inflation of higher importance. Estimates call for the overall CPI to post a 0.4% increase and the core rate to post a 0.1% rise.

Lender rate sheets are similar to the repriced ones of late afternoon. The par 30 year conventional rate mortgage has risen to the 4.375% to 4.625% range for well qualified consumers. There are a few lenders offering 4.25%. The par 15 year conventional rate mortgage held steady in the 3.75% to 4.00% range.

Rates have risen dramatically since last week and a correction is due. If you can tolerate the bumpy ride, I feel floating today is the way to go. At some point money will flow back into the bond market. Hopefully tomorrow’s CPI data will be much like today’s PPI data showing inflation to be tame which might encourage market participants back into the bond market.