It seems that market particapants have fallen back in love with fixed income. Mortgage backed securities and treasuries each posted a healthy rally yesterday. MBS improved by another 50 basis points which allowed all lenders to reissue new rate sheets after the gains held through close. Helping to promote fixed income is changing investor sentiment regarding inflation, demand for US debt, and prospects for economic recovery.
We did receive 3 pieces of economic data on Tuesday, of which 2 were favorable for MBS. First out was Housing Starts which came in considerably higher than economists' expectations. This news would normally help stocks as new home construction leads to higher appliance sales, flooring sales, furniture, etc... But stocks still lost out, suggesting the recent rally may be overbought as some have argued. We also got the monthly Producer Price index which gives a measure on inflation. This report came in better than expectations reaffirming that inflation is not a concern right now. Lastly, we got Industrial Production which indicated that manufacturing fell more than expected last month. Less manufacturing is a sign of less demand which is not good for corporate profits thus equities sell off while fixed income benefits.
More inflation data hit the tape today in the form of the Consumer Price Index (CPI), which measures a fixed basket of goods at the consumer level. This came in at .1%, better than the .3% forecast. The core was in line with estimates coming in at .1%. The core reading strips out food and energy due to their volatility and is the favored measure on inflation to the Fed. Ben Bernanke and other Fed officials have sounded no alarms regarding inflation and hopefully that will be supported by this data set. The report continues to confirm that inflation is not an immediate concern.
Of lesser signifance is the release of the Mortgage Bankers' Association Purchase applications index which simply gives a measure of whether new loan applications for purchase and refinances are increasing or decreasing. With the recent run up in mortgage rates, we were expecting a drop and we got it. The index has just been posted indicating that purchase applications dropped by 3.5% in June while the refinance activity posted a much larger decline of 23%.
We also have some headline news items. Federal Reserve Chairman Ben Bernanke and FDIC chair Sheila Bair on tap, giving a speech to the Operation Hope Financial Literacy Summit in Washington. Any time that he or she speaks, market particapants will be listening closely for any hint at future monetary polcy and their outlook on the economy. In addition, President Obama will be announcing new reforms for the financial industry. Matt and AQ will keep you posted on any relavant news items from the conference and the President.
Due to the priviledge of serving as a juror, I will be sitting in a jury box before the first rate sheet hits my mailbox. If we can hold current levels, I suspect that most lenders will offer par 30 year fixed rate mortgages in the 5.00% to 5.25% for the best qualified consumers. So far this morning, things appear to be setting up nicely for another positive day. Stock markets across Europe are posting declines' our own Dow futures point to a lower opening and inflation is contained for now. Even though mortgage rates are trending lower, we must remain defensive as sentiment can shift quickly.
Many consumers missed the last refi wave when rates hit the 4.5% range for a 30 year fixed rate mortgage. Many of those consumers were under the belief that rates would go lower and lower so they held out instead of taking advantage of what was in front of them. The talk around the water cooler was rates going to 4%. If you are still on the sidelines, what rate are you waiting on before you pull the trigger?
If you would like to get intraday updates on what is happening in the MBS market, click over to the MBS Commentary blog. Matt and AQ post updates throughout the day regarding the movement of MBS and it's affect on mortgage rates.