FNMA Bonds drive mortgage rates. These bonds react negatively to inflation, because inflation over time render the bond less profitable.
Today's economic data is not inflation friendly. The Producer Price Index which tracks the average price of goods received by the producer. The index is measured with and without the more volatile food and energy prices. Both readings were around double the expectations.
In addition the Retail Sales report was stronger than expected by .6% and by 1.01% excluding the automotive sector. Traders regard this positive retail sales as good for stocks and economic growth. This is also usually bad news for mortgage rates as traders move money into stocks, causing mortgage bond rates to rise.
This news should damage bonds greatly, but as of 7:42 AM PST, FNMA MBS's are only up 2/32nds on the 6.0% coupon and 5/32nd's on the 5.5% coupon.
This will lead to increased discount cost of roughly 25bps this morning when lenders release rates (PF has already released at this amount), but not as high as we would normally expect with this kind of inflation and retail data. The offset is likely due to weakness in stocks which are currently down 64. All in all, 25bps is great news considering the data.
Expected 30 YEAR FIXED PAR NOTE RATE = 5.75%
Today's data is negative for the bond market and mixed for the stock market. With the 6.0% coupon at 101.05(bid) currently, we are still relatively high on historical bond prices and the moving averages. The blanket advice remains: if you are conservative, like the rate, or can't afford for rates to go up, lock is the best bet. Again, despite the inflation data and strong retail report, I remain bearish on the mid to long term economy and will float anything not closing this month. Tomorrow brings us the Consumer Price Index which is more important than the PPI. If it validates inflation data from the PPI, inflation will be an important concern until energy, gas, and oil prices go down. Inflation concern means rising rates. We'll find out tomorrow.