We saw a lot of volatility last week for mortgage rates.  This is often the case on weeks where there is a limited amount of scheduled economic release data.

This week is the opposite.  There is a significant amount of data for the markets to digest ranging from the Federal Reserve's interest rate announcement, closely watched inflation measures, manufacturing data, consumer data, and jobs data.  All in all, this is the most action-packed week we've seen in a while.

As such, there is good potential for rates to improve if the data is favorable to the mortgage bond market.  Unfortunately, there is just as much potential for rates to worsen if the economy reads stronger than expected or inflation worse than expected.  This occurs because a strong economy encourages investors to keep more money in the stock market.  This leaves too many sellers and not enough buyers in the bond market (of which mortgages are a part), and so sellers must offer higher interest rates in order to entice buyers.  These higher interest rates are passed on directly to you as consumers.  Conversely, when the economy is suffering, investors seek the safe haven of fixed income investments such as mortgage bonds.  More buyers than sellers mean that sellers can raise their prices and offer lower rates of return on those bonds.  This directly lowers mortgage rates.  As far as inflation, bonds will always suffer with inflation as the rate of return is fixed, so the higher inflation is, the lower the effective rate of return on bonds causing investors to demand higher returns if they are going to get on board.  Again, their rates of return going up means mortgages rates will go up by the same amount.

 So all in all, if you are firmly convinced of a weak economy and that the reports scheduled for release this week will show worse than expected economic weakness coupled with moderate inflation, then we should rates greatly improve throughout the week.  Keep in mind though that the weakness of the data is not what will move rates, but rather the degree to which actual numbers differ from analysts expectations.  The reason for this is that the market is already trading based on what analysts think is going to happen.  If they are more pessimistic on the economy than you, and the data is average, rates are going to go up because the market has already "baked in" an overallowance of risk based on analysts predictions.

That's what makes it tough to call: we know the economy is weak, but how do we know if the analysts have already hit the nail on the head?  We don't.  So all we can do is to take a look at the historical context of the data and ask ourselves if the predictions "feel" high or low.

Speaking of historical context, this evening and tomorrow morning are fine days to lock.  If rates improve this week, it probably won't be by enough to make you regret your decision to lock.  But if they worsen, they can do so precipitously. 

Stay tuned to the financial news and this blog for recaps on what we are seeing in the economic data.