Mortgage backed securities (MBS) moved marginally higher yesterday following worse than expected jobless claims numbers.   The improvement in MBS prompted a few lenders to reprice for the better but  most decided to hold back intraday gains.

The US Department of Labor released the monthly Consumer Price Index (CPI) which reports inflation at the ever so important consumer level.   Just like the Producer Price Index released yesterday, this report gives us 2 readings, the headline number and the core number.  The headline number reports overall inflation while the core reading strips out food and energy as they are quite volatile in price.   The Federal Reserve prefers the core reading as the best indicator of inflationary pressure.   For the month of April, the headline consumer inflation was flat while the core rate jumped higher.  Headline inflation came in right on expectations of a 0.0% change while the core rate came in higher than expected at a month over month increase of 0.3% compared to expectations of only a 0.1% increase.

 On the surface, the increase to the core rate is a concern; however, over 40% of the gain was due to a second consecutive hike in tobacco taxes from states looking to increase lost revenue.   Year over year, the headline CPI posted a -0.6% decline which is the weakest reading since 1955.  The core rate moved slightly higher year over year from last month to post a 1.9% increase.   If oil continues to move higher, cost push inflation may become a concern again.  Currently oil is trading a little lower at $58 a barrel.   Even though the Fed’s favorite gauge is the core which does not include the price of oil, keep in mind that everything you buy has the price of oil worked into it. .  Although near term inflationary risks are minimal because aggregate demand is low, MBS  still sold off following the release.

The New York Fed released the monthly Empire State Manufacturing survey this morning. This data set gives investors an idea of the strength or weakness with the manufacturing segment of our economy in New York.   The survey shows that business conditions continue to improve with a -4.6 reading vs expectations of a -12.0.  Readings above 0 indicate a growing sector while readings below 0 indicate a sector that is contracting.  Even though this report shows manufacturing still contracting, it is showing signs of improvement.  Just 2 months ago the reading was at -38!   Since the release, no reaction from the markets. 

Next, we got the release of Industrial production numbers which measures the physical output of our nation’s factories, mines and utilities.   If factories production is increasing it is a sign of a growing economy because someone has to be buying the products they are producing.  So a higher than expected reading is positive for the stock market, while the MBS market prefers a slower growing economy and a lower reading than expected.  The report shows that manufacturing continues to contract but the pace appears to be slowing.  Expectations were for a -0.6% contraction but the actual numbers came in slightly better at -0.5% following last month’s -1.5% decline.  After the release, not much reaction from the markets. 

The last report of the day and the week is the Consumer Sentiment numbers.  This report is a survey of 500 households on their personal financial conditions and their attitude about the economy.  A good feeling consumer is much more likely to spend while a pessimistic consumer is more likely to save.  The MBS market prefers a pessimistic consumer.   The survey says…. Consumer sentiment at 67.9 basically in line with expectations and slightly better than last month’s 65.1 reading.   The last few readings on this survey is showing that Americans do see some light at the end of the tunnel.  How do you feel about the economy?  Do you see signs of improvement where you live?  Since the release of this report, the stock market has moved from its highs of the day and is currently trading in the red and MBS have moved off the lows of the day but still below yesterday’s closing levels.

So far this morning, MBS have given back a couple ticks following the release of a key economic reports. Early reports from fellow loan officers are showing lender’s rate sheets to be very similar to what we had yesterday.  This will keep par 30 year conventional rate mortgages in the 4.5% to 4.75% range for the best qualified consumers.  Quite often on Friday’s lenders do reprice for the worse later in the day even if MBS are holding steady or improving.   If you have to lock your loan today, I would suggest that you lock early and not wait hoping that lenders improve pricing late day.   I am not saying that lenders will not pass along gains if we improve, but the past does suggest that lenders are very stingy on Fridays.

For intraday updates, make sure you check out the MBS Commentary blog.  

And let’s not forget, TGIF!!!!!