Tuesday 3/17…Mixed Data on Inflation

Yesterday, mortgage backed securities which are the investment vehicle that sets mortgage rates, had a pretty boring day trading in a very tight range and closing about where they opened.  So far this morning, that trend looks to continue which should make lenders rate sheets basically the same today that we had yesterday.  This should keep par 30 year conventional mortgages anywhere from 4.75% to 5%.  To qualify for a par rate, you would need to have excellent credit, pay all closing costs associated with the loan and 1 point loan origination. 

Today we did get the release of some economic data.  First, the big surprise was housing starts.  Economist’s where expecting a reading of 450,000 housing starts; however, the number came in considerably higher at 583,000 on a annual basis.  With the number of homes available for sale, I would have liked to see a lower number but on the news there was really no reaction to mbs.  We also got the release of inflation data in the form of the Producer Price Index(PPI).  This report is not as important as consumer inflation data which we get tomorrow.  PPI measures the change in price of products that producers buy to make goods that they can sell to consumers.  The reason this report is not as important as consumer inflation is that many times when producers have to pay more for products they sometimes do not pass along the higher costs to their customers.  There are two readings when we get inflation data, first we get the overall and than we get the core reading which strips out food and energy and is considered more important.  The reason why the core reading is more important is due to food and energy is too volatile.  Let me give an example, lets say that a freeze happens in Florida.  Keep in mind, this is the start of the orange growing season.  If a freeze hits Florida, the orange crop is going to be quite damaged resulting in fewer oranges available for sale.  When you have fewer available for sale, what happens to the price?  Price goes up, law of supply and demand.  If the price goes up, that is inflation, correct?  Yes, but is the price going up due to economic circumstances or is it going up due to an act of God, a freeze.  This is also why they strip out energy, oil, but keep in mind everything you buy has the price of oil already in it since you buy oranges at a store but they are not grown in the backroom, they are shipped to the store.  This is why the Fed puts more weight on the core reading rather than the overall reading. Back to the data, the overall PPI reading came in slightly better at a month over month increase of .1% when economists where expecting a .4% increase.  This is a positive for mbs since inflation is not as bad as predicted.  The core reading came in at a month over month increase of .2% when economists where expecting a .1% increase, so this is negative for mbs since the core reading is higher than expected.  However, on the data mbs have held at their current levels since one was better and one was worse resulting in a push.

The Federal Open Market Committee(FOMC) starts their 2 day meeting today, and tomorrow they release their statement and set the federal fund rate.  Since the fed fund rate is at 0 to .25%, no room to cut further, but the statement is always the more important item.  The statement will be thoroughly read by investors for any insight into what the Fed may be doing.  Might they announce the start of the Fed buying US treasuries?  Will they cut the fed fund rate to 0%?  Will they start paying people to borrow?  I will of course let you know what we find out and how it will affect mortgage rates.  I would guess that they will say nothing that will negatively affect mbs and mortgage rates since the Fed is doing all they can to encourage lower rates as lower rates will help the housing market and our overall economy recover. 

Over the last couple months, MBS have been very attached to US treasuries but it appears that the love fest may be over.  Treasuries over the last couple weeks have been all over the place, one day they are up big, the next day they are down big.  During this time, mbs have held relatively stable in a very tight trading range.  The key to a successful lock/float decision is to float at the highs and lock at the lows.  Over the last couple months, mortgage rates have not wanted to move lower than the current level, so we are at one of the lows.  Yes, rates can and very possibly might go lower, but it seems we have hit a very solid floor that is preventing lower rates.  What will it take for a move lower?  Hard to say, but the government is trying all they can to move rates lower so the statement we get tomorrow from the Fed might have an impact.  Now, that impact could be positive or could be negative, so if you are floating an interest rate keep that in mind.  Locking today at the lows might be a good strategy especially if you are closing in the near term.

I will get back to you later with an update.  Currently mbs are up slightly, not enough to result in positive reprices, the 10 year treasury is at a 2.92 yield and the dow is up by about 25 points. Generally speaking, if the 10 yr yield moves lower and the dow moves lower, mbs could move higher resulting in better rates.