Prices of mortgage backed securities (MBS) moved higher yesterday following  a weaker than expected retail sales report that sent stocks lower and sparked a rally in the seemingly oversold bond market.   In total, MBS gained about 4 ticks on the day which helped lenders reduce borrowing costs by about .125 in discount.

Onto the data for the day.

The Bureau of Labor Statistics reported that for the week ending May 9 initial jobless claims increased 32,000 to 637,000.  Economists surveyed were expecting 609,000 new filings following last week’s revised reading of  605,000.  The continuing claims, which reports the number of Americans who continue to file due to lack of finding a new job, set its 17^th straight record reading at a whopping 6.56 million.  Last week’s jobless claims showed a decent drop from the prior week which created optimism that the end of the recession is in sight.  This led to a nice rally in the stock market which resulted in the flow of money leaving fixed income investments (MBS and Treasuries) to fund the stock rally.   This morning the data was worse than expected. Normally this would result in a selloff in fixed income, however short term trading strategies are currently dominated the market. After yesterday's rally , bond buyers used this weak data as an opportunity to take the profits or to "sell into the rally".

The Bureau of Labor Statistics also released their monthly Producer Price Index (PPI) which gives investors a reading on inflation at the producer level.   As with many past reports, we continue to see that inflation is of no concern right now with the PPI showing its biggest year over year decline in producer prices since 1950!!  The PPI report provides us 2 readings, the headline and the core rate which strips out food and energy.  Headline PPI showed a month over month increase of 0.3% vs expectations of a 0.1% rise while year over year posted a -3.5% decline.  The core rate came in right on expectations, increasing month over month by 0.1% and year over year posted a 3.4% rise.  It appears that the increase in the headline reading was the result of a 1.5% increase in food prices while energy costs declined 0.1%.  With energy prices on the rise and food prices rising, the Fed will keep a close eye on things to get ahead of any inflation.  Tomorrow we get a more important report regarding inflation with the Consumer Price Index (CPI) which measures changes in price at the consumer level.   Consumer inflation is much more important than producer inflation because quite often producers do not pass along the higher prices to their clients and customers.  On the subject of inflation, specifically your grocery bill, have you seen prices rising?  I haven’t seen higher prices while grocery shopping with my wife, but how about you?

Both of the reports released today are positive for MBS but in a sign of the times, but as discussed markets are not acting in a predictable manner.  Currently stocks are trading in positive territory and Treasuries and  MBS are relatively flat. The 10 yr Treasury note will likely hover near 3.13% today, but then again the day is young and there is plenty of time for headline news or just another round of profit taking to stir things up.

Early reports from fellow mortgage professionals are showing par 30 year conventional rate mortgages in the 4.5% to 4.75% range.  In order to qualify, you must have a FICO credit score 740 or higher, a loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.   A consistent pattern we have seen over the last few weeks is a selloff of MBS on Thursday and Friday.  Followed by improvements on Monday, Tuesday and Wednesday.  If you are planning on closing in the short term, less than 2 weeks, you might want to consider locking today as lenders are offering pretty aggressive rates this morning.  If you have time to wait, you can probably safely float but be prepared for MBS to move lower increasing rates followed by a recapture of the losses the following week.