After two weeks of steadily increasing mortgage rates, from the mid 4's to the mid 5's, volatility in the mortgage market has show signs of stabilization. Last week mortgage rates topped out near 5.625% before a late week MBS market improvement allowed lenders to lower the par 30 year conventional fixed mortgage rate closer to 5.25%. This week begins with MBS trends continuing to indicateg that mortgage borroworing costs should continue to moderate.

For new readers and as a reminder for long standing rate watchers, the foundation for how mortgage rates are generated is built upon trading in the secondary mortgage market, specifically mortgage backed securities(MBS).  If investor demand for MBS is high, prices are generally moving higher which helps mortgage rates tick lower.   If investor demand is weak for MBS, that drives prices lower, which increases mortgage rates.   Investor demand is determined by their perception of the overall economy and the gyrations for the yield curve.  If investors believe the economy is strong and growing, they tend to move their funds into higher yielding stocks as a growing economy tends to lead to higher corporate profits and higher returns for their investment dollar.  When our economy is struggling, investors tend to move their money into safer lower yielding investments such as MBS and treasuries to avoid losing money by holding stocks.  During a struggling economy, corporate profits tend to decrease or disapppear thus the flight into safer assets.  Investors make their investment decisions based on many factors including economic reports which are released almost on a daily basis. (Read More: HOW ARE MORTGAGE RATES DETERMINED?)

This week the marketplace will be focusing on data and headline news from Capitol Hill (as opposed to Treasury auctions like last week). Let's see what's scheduled to move money this week...

Monday
Empire State Manufacturing Survey which is a monthly survey conducted by the New York Fed that gives investors a gauge into the strenght of manufacturing in the New York Area.  A strong manufacturing sector is a key indicator of a growing economy since manufacturing will only pick up if consumer demand is strengthening.   Readings below 0 indicate a contracting sector while readings above 0 indicate a expanding economic sector.   A big factor that has contributed to the recent run up in mortgage rates is the belief that the end of the recession is near (on top of technical trading strategies).  Last month, this report helped to contribute to that belief coming in much better than the prior month moving from -14.7 in April to -4.6 in May.   Even though this report continues to show a weak sector, it is indicating an economy that is stabilizing.   Economist's surveyed are expecting a read of -2.0.  MBS tend to improve with a worse than expected reading.

Tuesday
Housing Starts which measures the number of homes that initial construction has begun.   April's report indicated that housing starts fell almost 13% to an annual pace of 458,000 units.  This is the lowest reading since 1959.  Economists surveyed are expecting this report to indicate that housing starts are improving to an annualized pace of 500,000.

Producer Price Index(PPI) measures inflation on the producer level.   If producers have to pay more for the materials needed to produce goods, they either have to increase their price points (inflation) to make up for the increased costs or absorb the cost which results in lower profits.   This report is not as important as the consumer inflation report we get on Wednesday, but any hint of increasing inflation usually causes MBS to sell off leading to rising mortgage rates. In April this  report indicated that producer prices increased 0.3% following March's drop of 1.2%.  When excluding food and energy, there was only a 0.1% rise last month.  Economist's surveyed estimate the May report will indicate a 0.7% rise in the overall PPI print and 0.1% in the core number.  Currently the Fed has very little concern regarding inflation.

Industrial Production measures the physical output of our country's factories, mines and utilities.  If industrial production is on the rise, that is a sign of a growing economy. MBS tend to improve with a worse than expected reading.  Following last months reading of -0.5%, economists are expecting this report to show continued weakness with a -1.0% reading.

Wednesday
Mortgage Bankers' Association Applications Index which tracks the number of purchase and refinance applications at mortgage lenders.  This report helps investors gauge if housing activity is trending higher or lower.  Higher demand in housing is generally seen as a positive economic indicator since you would have to feel pretty confident in your own personal finances and the current state of the economy to buy a new home. \

Consumer Price Index(CPI) measures inflation at the consumer level.  Since inflation is the biggest enemy of mortgage rates (fixed income), any hint of inflation can lead to higher mortgage rates.  So far this year, there has not been any signs of inflation besides the recent spike in oil prices.  Overall consumer inflation in April came in flat at 0.0% and economists surveyed are expecting May's report to show a month over month increase of 0.3%.  When excuding food and energy, the core reading, economists are expecting a 0.1% increase following last months 0.3% rise.

Thursday
Weekly jobless claims tracks the number of Americans that file for first time unemployment benefits.  Expectations call for 610,000 first time claims following last weeks better than expected read of 601,000 new claims.  Recent jobs reports are indicating a stabilization in the labor market which could be an indicator of an economy that has bottomed out, looking to recover.  Even though the number of jobs lost and first time claims are indicating a slower pace of jobs loss, the continuing claims which totals the number of Americans that continue to file for lack of finding a new job, did set a new record last week at 6.816 million.  MBS tend to beneft with a higher than expected reading.

Leading Indicators measures the overall strength of the economy.  Last month's report indicated the first gain in 7 months coming in at 1.0%.  Economists surveyed are expecting another 1.0% reading for May.

Philadelphia Fed Survey  gives investors a gauge into the strenght of manufacturing in the Philadelphia area.  Readings below 0 indicate a contracting sector while readings above 0 indicate a growing sector. This index has shown signs of improvement in recent months and economist's are expecting that trend to continue.  Last month's report moved higher from -24.4 to -22.6 and expectations call for a -15.0 for this report.  Last month's report was the best reading since September 2008! 

On Thursday we  find out today the amount of treasury notes that will be auctioned at the next Treasury auction.  It is expected that about $101 billion in 2 year notes, 5 year notes, and 7 year notes will be offered.  The added supply of debt available will apply pressure on Treasury yields to rise which also pressures mortgage rates to rise.

That is it for the week as far as economic reports.   We do have some Fed speak this week highlighted by Federal Reserve Chairman Ben Bernanke and FDIC Chair Sheila Bair speaking at Operation Hope Financial Literacy Summit in Washington on Wednesday.  Any time Bernanke and Bair speak, investors will be listening to any hint at future monetary policy and their outlook on the economy.  Their words can have an effect on the markets. Furthermore the Obama Administration is expected to outline sweeping reforms of the financial industry, so stayed tuned into Capitol Hill this week.

My public duty calls me today.  I have been summoned for jury duty so I will not be able to provide my customary rate quotes.   We should see par 30 year fixed rate mortgages in the 5.125% to 5.375% range for the best qualified consumers.

If you are currently deciding whether you should lock or float, click over to the MBS Commentary blog.  MG and AQ will provide multiple updates throughout the day regarding the movement of MBS.  They will also go indepth on what is driving the markets.