Mortgage backed securities had another losing day yesterday moving lower in price by .375 in discount.  Many lenders did reprice for the worse as the losses held through close.  The stock market is one of the driving forces behind bond market losses at the moment as bond traders are taking some of their cues about the long term economic outlook from current stock performance.  Sparking the stock market rally was the much better than expected earnings from Goldman Sachs and Johnson and Johnson.   If stocks gain, it puts a damper on the safety-oriented mentality that can spur demand for bonds like treasuries and MBS.    Although MBS have lost a fair amount of ground recently, bond and stock traders alike are waiting for additional data before a firm trend is likely to develop.  This includes several of the more anticipated earnings announcements as well as the scheduled economic data.  Of particular importance, according to many market participants, are earnings from JP Morgan, Bank of America and Citi.  Once those chips are down and this reasonably busy week of data is over, there is a higher potential for a trend to develop in MBS for better or worse.

On the surface, the economic data yesterday favored the stock market over the fixed income market, but as the markets had time to digest the less superficial aspects of the reports, mitigating factors helped ease bond losses and keep a stock rally in check.   Today we get several important data sets that will set the trend for today.

First out this morning is the weekly Mortgage Bankers’ Association applications index which tracks the weekly change in mortgage applications at major lenders.  An increasing trend in purchase activity would be seen as a positive indicator for equities as home purchases lead to many other purchases including furniture, flooring, appliances, etc… Also, one would have to feel very confident in their own financial position and job security to purchase a new home, so economic factors relating to consumer confidence are also in play.   The report has shown a large decline in purchase activity from last week moving lower by 9.4% and pointing to continued troubles in the housing market.  Many economists and talking heads have stated that housing is a critical component of our potential recovery and although reports on housing and mortgages can vary greatly from week to week, this one is certainly not indicating an imminent recovery.  On a positive note the refinance activity improved again last week moving higher by 18%.  The increase in refinance activity can be attributed to  the recent decline of mortgage rates back to the 5% mark.

In other data, the US Department of Labor released the monthly Consumer Price Index(CPI) which measures the price change of a fixed basket of goods and services at the consumer level.  One of the biggest enemies of mortgage rates and indeed of bonds in general, is higher inflation.   To explain why this is with broad strokes, if inflation decreases the value of today’s money, and fixed income investments pay a guaranteed return of today’s money, then the greater the inflation, the less and less a fixed income investment would return.  Of course it’s going to return the amount of money it promises (one hopes), but if you’re planning on getting $1000 back in a year on a fixed income investment and inflation is so bad that, in a year from now $1000 only buys two cheeseburgers, the VALUE of your investment is obviously not as high as it is today when that same $1000 could buy a new TV and a week’s worth of cheeseburgers.  Sounds like mortgage blogger paradise to me…

Back to the point, today’s data indicates a slightly higher than expected rate of inflation but most of the increase can be attributed to higher gasoline prices as was the case with yesterday’s PPI report.  The headline CPI came in right on expectations at a month over month increase of .7% but year over year CPI posted a -1.4% decline which is the biggest decline since 1950!  The core rate, which strips out volatile food and energy prices posted a slightly higher read of 0.2%.  The market had anticipated only a 0.1% increase to the core rate.    Year over year the core rate has risen by 1.7% which is well within the Fed’s comfort zone for inflation and better than last month’s 1.8% reading.  Our economy needs inflation to grow and the Fed would like to see core inflation between 1% and 2%.  With the recent decline in oil prices, this trend of higher consumer prices is not likely to continue.  Following the release of this report, MBS have continued to move lower which will result in higher consumer borrowing costs.

The New York Fed has released the monthly Empire State Manufacturing survey which gives market participants a read on the strength of the manufacturing sector around the New York area.  Readings below 0 indicate a contracting sector while readings above 0 indicate expansion.  The release has indicated a much better than expected reading of -0.55 versus expectations of -4.5.  This is a sizable improvement over last month’s -9.4 and contributes to the case for recovery which.  As you know, most of data that are good for the recovery are bad for bonds, so this certainly did not help this AM’s situation. 

The final data set this morning is the release of Industrial Production down -0.4% versus a consensus of -0.7%.   This report shows how much factories, mines and utilities are producing and better than expected readings are generally good for stocks and bad for bonds.  In May, this data set  posted a drop of -1.1%.  But remember, this is still a decline and “less bad” doesn’t necessarily equal “good.”

If you are keeping stats, the economic data, except for purchase applications,  is all negative for fixed income.  The downward pressure on MBS prices is continuing and so far this morning has posted another .25 in discount drop.  This trend may be short-lived as we still have the FOMC minutes later today, jobless claims tomorrow and earnings reports to digest.   Like yesterday, for MBS to manage any type of rebound they will need the stock market to move lower.  That looks to be a difficult challenge this morning as stock market futures are pointing to a significantly higher open.  If the stock market does change course, it will allow for money to flow back into treasuries first than into MBS.  Currently, the benchmark 10 year note is continuing to move higher in yield and is trading at 3.54.  Just last week, it was trading under 3.30!  One reason we feel the current market has not set a firm trend is that the trading volume is extremely low.  If market participants really feel the economy has turned, the rally in the stock market would see much higher level of trades.  This is a key indicator of the market waiting for guidance but unfortunately the rally in the stock market is at the expense of the fixed income sector.

At 2pm eastern, the Federal Reserve will release the minutes from their last Federal Open Market Committee.  Most of the information in the minutes will already be known, but market participants will review it thoroughly for any hints of future monetary policy and outlook on the economy.  Matt and AQ will post any relevant details after the release on the MBS Commentary blog.   

Early reports from fellow mortgage professionals are indicating the mortgage rates continue to move higher.  The par 30 year fixed rate conventional mortgage is in the 5.00% to 5.25% range for the best qualified consumers.  In order to qualify you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.  If you are accessing home equity, you should expect to pay higher costs or take a higher interest rate.  For consumers seeking FHA or VA loans, expect the rate to be about .25% higher than conventional loans.