Retail Sales Figures posted this morning higher than expected at 0.2% versus consensus estimates of 0.0. The reading was 0.1 excluding auto sales. This better than expected data would normally have a more detrimental impact on the bond market, but considering it's context, all is well. The context is gasoline. Higher gas prices are artificially creating a higher than justified number. Analysts acknowledge this and even point out that the better than expected reading is still fairly weak considering the portion thereof attributed to gas prices. Still, the inelastic demand for fuel is somewhat of a positive sign for the market bulls, as money spent is money spent, regardless of the "coercion" forcing it out of consumer's pockets.
But there is more bad news for the bulls. Signs of a weak consumer are readily apparent now the we have entered earnings season. Company after company is reporting weaker than expected earnings or lowering forecasts. GE's bad earnings news pulled stocks down appreciably on Friday. Today, Wachovia may be taking the driver's seat for that role. In addition to these giants, numerous other firms are reporting weaker than expected.
Business Inventories numbers are yet to report this morning and will be out in roughly 15 minutes. This is normally not a huge impacter of MBS prices, but nonetheless will provide traders some clues as to the economic climate. It's a tough report to read because the higher isn't necessarily better as it can signal that prices will have to be lowered which will drag down profits. It's difficult sometimes to tell how high is too high and we usually won't know until we see how traders react.
The much more important reports are tomorrow and Wednesday in the PPI and the CPI, which are some of the most important measures of inflation. As always, bonds hate inflation and MBS are no exception. If the reports read at or below expectations we could see mortgage rates fall even if the stock market advances. If they are higher than expected, we could see a sharp rise in rates. Traders have paid attention somewhat to the allaying of inflation fears by key officials and economists. If the CPI proves those utterances wrong on Wednesday, we may have to give up much of what we received.
Right now the 5.5% coupon is just barely holding on to 101-00 after losing ground this morning. Some of this may be due to the retail sales numbers and some due to the "preparation" for inflation numbers.
With respect to locking and floating, unless the CPI is on our side, it seems that we continue to get thwarted if the 5.5% coupon rises above 101-00. If you have the rate sheets with 5.375% close to PAR, it's safest to take it now. If you have a quick trigger finger, you might chance it going into the inflation reports, but at the first sign of higher than expected inflation, be ready to lock.