Even though today's economic data was weak, inflation concerns are keeping rates from improving.

Economic reports showed a contracting manufacturing sector and further decreases in construction spending.  In addition the PA Fed President Charles Plosser commented that lowering interest rates was a bigger priority than fighting inflation.  So what gives?

Remember that the Fed rates do not equal mortgage rates.  Mortgage rates are tied to MBS (Mortgage Backed Securities) which are traded like other bonds.  Occasionally when the Fed lowers rates in an inflationary environment, the rate cut can have a negative impact on bonds.  The reason is that bonds are a fixed income investment so inflation makes them worth less over time.  Bond holders sell, which lowers the price, increasing the yield, thus increasing mortgage rates.  So if inflation is a big enough concern, mortgage rates can go up while fed rates are going down.

There were no economic reports that spoke to inflation today, just Plosser's comments.  In addition, Gold prices are at an all time high.  Inflation hawks widely regard gold prices as a key indicator of inflation concerns.  So even with weak economic data, which normally helps us, and no economic reports suggesting inflation, the simple headline from Plosser combined with the price of gold are bringing mortgage rates back up a bit this morning.  One final point of consideration is that rates had improved so much at the end of last week that there was some artificial technical impetus for them to regress to their average levels.

A conservative play would be to lock as rates could be pulled back towards to mean further this week.  Indeed the trend has been for rates to take 2 steps forward and one step back.  This week coincides with a "1 step back" considering past performance.  However, it could also be time for us to break through our bond price ceiling (the higher the bond price the lower the mortgage rate), owing to potentially crushing economic data.  But if gold stays high and inflation buzz prevalent, the economic data would need to b quite horrible for us to have more rate improvements this week.  If you believe we will get that horrible data, floating is a risk that could pay off.  If the data is in line with expectations however, we will probably lose a little ground this week.