Well, the data is as bad as it's supposed to be regarding the economy. The ISM manufacturing index reported a level of 48.3, only slightly off the expectation of 48.1. Anything under 50 signals contraction in the manufacturing sector.
Construction spending was down -1.7% compared to estimates of -0.7%.
In general, weak economic data is good for mortgage rates, but so far today we have given up some of the gains we received on Friday afternoon. Why?
In a word: inflation. We've had fun with this battlefield theme regarding inflation versus a weak economy. Just when it looks like one has the other pinned, the other one strikes back, as you might have guessed from today's headline. But there are no economic reports today that speak to inflation, so why are bonds down, especially when the stock market is down?
There is one news-related item that stands out. Charles Plosser, the President of the PA Fed, said this morning that economic stimulation is a bigger concern that inflation. This echoes statements heard from other Fed officials last week. It's a paradox, but Plosser saying that inflation is not a concern in fact causes it to be a concern for bond traders. The reason is that if the Fed says stimulus is more important than inflation, their course of action is to lower rates. Even they acknowledge that increased inflation is a likely side effect of rate cuts. For the 17 thousandth time, the Fed rates do not directly affect mortgage rates. It's the resulting impact on the economy that affects rates through normal macroeconomic forces. If the Fed cuts more, and inflation rises, bonds will be devalued. So bond traders sell their potentially devalued assets (including Mortgage Backed Securities) which lowers their price thus increasing their yield and/or interest rate.
In addition, Gold is at an all time high. This is a signal of inflation as well. I'm not sure why the other Mortgage Analysis websites are not pointing this out this morning, but it is very important. Inflation hawks love gold. When they buy, it's a hard sign of inflation.
So even though the data is weak, and even though a Fed President says "don't worry about inflation because our economy is so weak," and even though the Fed will be lowering rates again, mortgage bonds are not improving today due to inflation.
An ancillary factor is some "technical ceiling" selling as well. In other words, bond prices had reached (nearly) their levels of late January. The farther the daily values stray from the mean, the more likely they are to regress. We gained so much on Friday afternoon that even today's selling, with the 5.5% MBS down 11/32nds, will not cause a huge increase in rates.
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 be 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 (as was mentioned in last week's blog)
It's going to be a volatile week. Stay tuned...