First of all, I hope everyone had a wonderful Easter weekend with friends and family.  My wife and I enjoyed ours, but now back to work. 

So far this morning, mortgage backed securities (MBS) are holding at unchanged levels.  This should allow lenders to pass along par 30 year conventional rate mortgages in the 4.625% to 4.875% for the best qualified consumers.  To qualify for the best rates a consumer would have to have a FICO credit score 740 or higher, fully document your income and assets and pay all closing costs associated with your loan including 1 point.   

This week, we will continue to receive corporate earnings which can have an impact on the flow of investment money.  Last week, Wells Fargo came out with a report of much higher than expected first quarter profits which helped to move the stock market higher at the expense of fixed income.  This resulted in par interest rates moving about .25 to .375 higher in costs.  If we continue to receive above expected numbers, investors will be tempted to sell their fixed income investments (MBS and Treasuries) and move the money over to the higher yielding returns of the stock market.

 Onto the data for the week:


-          Producer Price Index (PPI), which measures inflation on the producer level.  Inflation reports are always very relevant to MBS and mortgage rates as higher inflation leads to higher mortgage rates.  PPI measures prices at the producer level before they are passed along to consumers.  This report is not as important as consumer inflation reports due to producers sometimes do not pass along the higher prices to the end consumer.   This report is expected to show a month over month increase of 0.1% following last months 0.1% rise.  When excluding volatile food and energy, this report is expected to show a month over month increase of 0.2%.

-          Retail Sales, which measures the total receipts at stores.  Since consumer spending accounts for 2/3rds of GDP, higher than expected retail sales would be very positive for stocks and negative for MBS.  Economists are expecting this report to show retail sales up from last month 0.3% after the previous months -0.1% decline.  When excluding auto sales, this report is expected to show a flat reading of 0.0% month over month.

-          Business Inventories, which is the dollar amount of inventories held by producers, wholesalers and retailers.  When businesses are optimistic of future economic growth, they tend to increase their inventories to handle expanding sales, but when businesses are pessimistic, they tend to lower inventories due to a drop off in sales.  MBS tend to improve with a lower than expected reading.  This report is expected to show a month over month decline of 1.0% after the previous months 1.1% decline.   


-          Mortgage Bankers’ Association purchase applications which gives investors insight into demand for housing.  Strong housing demand is a very positive sign for the economy since a consumer will have to feel very comfortable in their own financial position to purchase a home so a better than expected reading can lead to investors selling MBS which results in higher borrowing costs.

-          Consumer Price Index (CPI), which is a measure of inflation at the consumer level and measures the month over month change in the price level of a fixed basket of goods and services purchased by consumers.  We get two readings with this report; we get the headline reading which includes food and energy and the core reading which excludes food and energy.  The headline reading is expected to show consumer prices rising 0.2% after last months 0.4% increase.  The core is expected to show consumer prices rising 0.2% which would be equal to the previous month.  Since inflation is the biggest enemy to mortgage rates, MBS tend to improve with a  lower than expected reading.

-          Empire State Manufacturing Survey which is a survey that gives inventors a gauge into the strength of our manufacturing segment of our economy.  Last month this report came in at very low reading of -38.2 and it is expected to come slightly better this month at -34.0.  MBS’s prefer a slower growing economy so a worse than expected reading would be positive for MBS.

-          Industrial Production which is a measure of the physical output of our nation’s factories, mines and utilities.  This report is expected to show another decline of -0.8% after the prior months -1.4% decline. If a company expects future economic growth, they tend to start producing more goods to match the expected rise in sales.  So, MBS tend to improve with a lower than expected reading.

-          Fed Beige book which is published a couple weeks before the monetary policy meetings of the Federal Open Market Committee.  This report is used at the FOMC meetings where the Fed sets interest rate policy every 6 weeks and it allows investors to see for themselves one of many indicators the Fed uses to set monetary policy.  


-          Housing Starts which measures the number of new homes that construction has begun each month.  If housing starts are increasing it could lead to future demand for furniture, appliances, flooring, etc…  So the stock market tends to rally with a better than expected reading and MBS tend to improve with a lower reading.   Last month, housing starts came in better than expected at an annual pace of 583,000 and is expected to come in this month at a yearly pace of 570,000.

-          Jobless claims, expected to show 650,000 US citizens to have filed for unemployment insurance last week.  Higher unemployment tends to keep wage based inflation in check, so MBS tend to improve with a higher than expected reading. 

-          Philadelphia Fed Survey which measures the strength of the general business conditions around the Philadelphia area.   The report is expected to improve over the prior months reading of -35.0 and come in at -30.2.  Readings below 0 indicate a contracting economy and readings above 0 indicate an expanding economy. 


-          Consumer Sentiment which is a survey of over 500 households each month on their financial conditions and attitudes about the economy.  Our economy is driven by consumer spending, so a positive consumer is more likely to spend money while a pessimistic consumer is more likely to save money.  Higher consumer spending can lead to inflationary pressures, so the MBS market tends to improve with a lower reading.  This report is also expected to show a slight improvement over the prior months reading.  Last month, this report came in at 57.3 and is expected to come in at 58.5 this month.

-          Federal Reserve Chairman Ben Bernanke will deliver the keynote speech at the Kansas City Federal Reserve Bank’s conference on Innovative Financial Services for the Underserved.  As always, when Ben Bernanke speaks, investors will listen for any clue regarding the economy or future monetary policy. 

Matt Graham, one of the featured writers at the MBS Commentary blog wrote an excellent post Friday that I would encourage everyone to read.  The blog goes over some very important technical analysis and includes some graphs to support his opinions.  If you would like to read, <<Click Here>>. 

Early reports from fellow mortgage professionals are showing par mortgage rates to be in the 4.625% range for the best qualified consumers. 

For intraday updates, Matt and Adam will be posting at the MBS Commentary.