We had another rather slow day in the mortgage backed security (MBS) world yesterday.   Early morning saw some choppy action, but by day’s end MBS eked out a small improvement on the day.  Since the seemingly  large drop in MBS prices late last week( Click here for an explanation) mortgages have managed to claw back and recoup more than half of the drop.   To remind all readers and for any new readers, as MBS move lower in price mortgage rates move higher and as MBS move higher in price mortgage rates move lower. 

Today brings the first of many key economic reports scheduled to be released this week, these data sets have the potential of moving the markets.  First, the Mortgage Bankers’ Association released their weekly purchase applications report which lets investors know whether purchase and refinance applications are picking up or slowing down.   With mortgage rates at historic lows and home prices at very affordable levels, the purchase applications index only showed a disappointingly small improvement from the prior week.   It appears that many buyers are still on the sidelines, possibly due to the employment situation.  Unemployment is expected to climb to almost 10% which would cause many potential home buyers to thoroughly think before they move forward.   The refinance activity is still very high but it is showing signs of slowing down.  Since housing is a key component of our economy, and mortgage application activity slowing (while rates remain at all time lows) it may be time for the government to step in with another program to boost lending...perhaps assist in the funding of the warehouse lines of credit that mortgage bankers use to close their loans.

Retail sales report was released this morning . After a 1.3% drop in retail sales in March, the US Commerce Department reported that for the month of April retail sales were down again by 0.4% , most economists were expecting a 0.1% increase.  When excluding auto sales from the data, the numbers indicated a 0.5% drop compared to estimates for a 0.3% increase.   Once this data was released, stock futures moved lower and MBS began improving.    This report is very friendly for fixed income investments and has been a key reason why MBS and treasuries have made gains all morning.  Already this morning, the benchmark 10 year treasury note has improved by more than half a point bringing the yield down to 3.10% for the first time since the last FOMC meeting. .  As expected, MBS are improving but to a lesser extent than treasuries which has been a recent pattern over the last few weeks.

Next comes the release of the Import and Export prices report which gives investors insight into inflationary pressures.  On first glance, this report seems to be negative for MBS, but after further review we do have some positive data.  Import prices for the month of April jumped much higher from last month’s 0.5% increase to post a 1.6% increase.   Since inflation is the biggest enemy to mortgage rates, it is concerning to see such a sharp increase in the price of products we import; however, the jump in prices can almost exclusively be attributed to the increase in energy prices.  Petroleum imports increased 15.4% last month and when you exlude that data, import prices fell again by 0.4%.  One reason for the rise in the price of oil is the optimism that the recession may be nearing an end so the demand for oil will increase.   The price of a barrel of oil has moved considerably higher over the last few weeks and is touching the $60 per barrel mark, but this morning oil is moving slightly lower.   Export prices were reported to show a 0.5% increase following last month’s 0.6% decline.

So far this morning, MBS are moving higher which should allow lenders to lower borrowing costs by .25 in discount when compared to yesterday’s rate sheets.  Early reports from fellow mortgage professionals are showing at least one lender offering 4.5% today for a 30 year conventional rate mortgage.  To qualify, you must have a FICO credit score over 740, and loan to value at 80% or less and be willing to pay all closing costs including 1 point loan origination/discount/broker fee. 

Tomorrow we do get another report regarding inflation and the weekly jobless numbers.  Both of these reports can have a major affect on the movement of MBS and the flow of money between fixed income and equities. 

For intraday updates on the movement of mortgage rates and other real estate related news, click over to the MBS Commentary blog.