We couldn't hope for any more friendly mortgage rate news today.  The PPI (producer price index) which measures the cost of goods at the producer level was at or below expectations, which is a preliminary sign inflation is at bay.  This is great news for mortgage rates as inflation kills the value of Mortgage Backed Securities over time, thus forcing traders to lower prices to offset the expected inflation.

Even better (worse for the economy, but better for bonds) was the retail sales report.  I've argued in previous articles that the dried up well of home equity must eventually cause a decline in consumer spending.  Today's retail sales report unexpectedly dropped .4% both with and without automotive data being included, which was much lower than expectations of 0 to -1% respectively.

This is on of the most stark warning signs the economy has received of the possible impending decrease of consumer participation in the economy.  If it's coupled with other good news for rates such as inflation being low, rates will continue to go down.

 In early trading, the FNMA 30 year fixed MBS 5.0% Coupon is up 11/32nd's already.  Though other coupons are not quite as drastic, they are improved all across the board.  Assuming this holds steady, expect even lower rates this morning.

Keep an eye out for the business inventories number released at 10AM EST.  Unless it deviates greatly from expectations, it should not affect rates much.  If inventories are the same or lower, this will only be good for bonds as it is a signal that producers don't expect high volume in the coming months.  Even if it is higher, it pales in importance to this morning's retail sales report.  

Lock Comment: Let's see where rates come out when they are released this morning.  Stock futures are down on some painful news of losses among large financials.  So far, the bond market is loving that.  If this holds for the next two hours, you will be opening your rate sheets to the lowest rates you've seen in over 2 years yet again.  Based on MBS prices, I'm expecting a full .25 improvement to cost this morning.  Any time we test the upper limits of the daily moving average on bonds, the technical read of the data always suggests locking is the safe bet medium term.  That said, we appear to be bucking the trend currently and breaking through a glass ceiling in MBS's.  Expect volatility in stocks this morning as traders will try to determine if the financial losses are reason to sell or if the multi-billion dollar injection of foreign capital is reason to buy. 

As I said yesterday, at these price levels, positive economic news will have a sharper impact on bond prices than negative economic news.  This is due simply to technical factors.  In other words, think of the 50-200 day moving average of bond prices as a rubber band.  The farther the rubber band deviates from neutral, the more resistance for it to move farther.  Current bond prices have stretched that rubber band as tight as its been in a long time (in our favor).  The general trend is for continued improvement, but be aware of these technical factors.  This is why bond-negative news can snap rates back up rather sharply.  The best news here is that the foreign investment injection is not detracting from bonds this morning (the way it did the last time a major financial received over a billion dollars from overseas).  That is probably the best news that bond traders are concerned more with the raw data from the economic reports. 

So float though the morning, but watch stocks and stay tuned to this blog.  Have your loans ready to lock if the Dow hits big.  Even though the economic news is all on our side.  If traders see a buying opportunity today and run up stocks, that money has to come from somewhere, and it will likely be our pockets.