Mortgage rates moved a few basis points lower yesterday after producer price data indicated inflation is still not a market moving concern. This data came out early in the morning which allowed lenders to improve rate sheet pricing right out of the gates.  After that, mortgage backed securities prices moved sideways for most of the day before closing slightly above the price which they opened. Most lenders left rate sheets unchanged on the day, at very aggressive levels.

The economic calendar was packed today. First out was consumer level inflation data, the CPI.
The Bureau of Labor Statistics released the Consumer Price Index at 8:30 this morning.  This index measures the price change of a fixed basket of goods and services purchased by consumers, also known as inflation, the enemy of interest rates.  When judging inflation, we tend to consider consumer prices  to be much more important than producer price levels.  During periods of bad economic times, producers find it difficult to pass along higher prices to the end consumer which makes tracking consumer inflation reports much more important. However, it should be noted that rising producer prices can force managers to have to make difficult decisions about how to maintain profitability when price levels are rising and consumer demand is weak. Usually cost cuts come in the form of layoffs, so even though consumers are not feeling the effects of higher production costs directly, the overall economy suffers because it is harder for unemployed folks to find a job.
Just as PPI data was tame, so too was CPI data.  Overall, consumer prices were unchanged on a month over month basis, this was better than economist expectations for a 0.1% increase in price levels.  The more important core rate, which strips out food and energy, came in right on expectations with a month over month increase of 0.1%.   Year over year, overall consumer prices are up a modest 2.2% and core prices up only 1.3%. A dip in gasoline prices was a huge part of the overall weakness in inflation data. Do not expect that to continue in the months ahead as gas prices will rise heading into the summer months.  This is not a major concern though and is by no means a reason to believe the Fed will be altering their stance that accommodative monetary policy will be in place for an “extended period”, as they have stated in their FOMC statement for many months now.

Released at the same time was weekly jobless claims.  This report provides three measures on the health of the labor market:
1. Initial Jobless Claims:  totals the number of Americans who filed for first time unemployment benefits

2. Continued Claims:  totals the number of Americans who continue to file for benefits due to an inability to find a new job

3. Extended Benefits:  totals the number of Americans who have exhausted their traditional benefits and are now receiving emergency benefits

Since our economy is driven by consumer spending, economists track employment data to get a sense of future economic momentum. Higher jobless claims lead to less consumer spending, which is bad for the overall economy but generally helpful in keeping mortgage rates from rising.   The prior two week’s reports came in right on expectations.   Today’s release indicated 457,000 Americans filed for Initial Jobless Claims, slightly more than the 455,000 that was expected but still a decline of 5,000 from the prior week.   Continued claims rose by 12,000 to 4.58million while the number of Americans receiving emergency Extended Benefits increased 352,800 to 6.04 million.  That is a record high and indicative that the labor market remains very weak.  For a in depth look into this report and the CPI report, check out AQ’s opening Commentary.

The next report of the day came from the Conference Board: Leading Indicators.  This is a composite index of 10 economic indicators that are expected to provide a forward looking indication of economic activity.  If the month over month change is positive, it indicates the economy is improving.  Most of the components of this report have already been released so this doesn’t give us much new information.   Economists were expecting an increase of 0.1% following last month’s 0.3% increase, and that is what we got.
The final report of the day provides a measure of the strength of manufacturing in the Philadelphia region.  When this report shows a reading above 0 it indicates improving conditions while readings below 0 indicate contraction.   Recent readings have shown continued improvements with last month’s report coming in higher than expected at 17.0.  Today’s index was 18.9, slightly higher than what was expected.  
Also of note today was the announcement from the Department of Treasury of the size of next week’s offering of U.S. debt.   When our government doesn’t enough money to pay for spending, they borrow money by issuing Treasuries.  The added supply of debt on the market can pressure both Treasury and mortgage yields higher. Market participants expected today’s announced sized of 2 year, 5 year and 7 year notes to match the last offering totaling $118billion.   The announcement came in as expected with $44billion of 2 year notes coming to market next Tuesday, $42billion of 5 year notes being offered on Wednesday and $32billion of 7 year notes coming on Thursday.

After the release of this statement, benchmark yields rose and MBS prices fell. This forced many lenders to reprice for the worse. READ MORE ABOUT HIS THIS AFFECTED INTEREST RATES

After the reprices for the worse, lender rate sheets are worse than yesterday.  The best par 30 year conventional rate mortgage does remain in the 4.75% to 5.00% range for well qualified consumers though, it will just cost a few more basis points at the closing table.  To secure a par interest rate you must have a FICO credit score of 740 or higher, a loan to value of 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee.   If you are seeking a 5 year adjustable rate mortgage, you should expect a par interest rate in the 3.375% to 3.625% range with similar qualifications and costs.   ARMS are a great option for consumers who know they will  not be keeping their current home for many years, but they do come with more risk.  Consult with your mortgage professional as to the best mortgage option for you and your family.
I have said many times in the past that you should lock at the price highs of MBS and float the lows.  Yesterday, MBS were near their highest price levels of the year thus I favored locking all loans closing within 30 days.  MBS prices are a few ticks lower today but still very close to the price highs so I will continue to advise readers and clients to lock.  Lenders and market participants continue to show they have no desire to drive mortgage rates lower then where they sit right now.