This week brings us some key reports regarding inflation.  As stated many times in the past, the biggest enemy to low mortgage rates is inflation.

Monday

-          Empire State Manufacturing Survey, economists expecting a -32.0 reading after last months -34.7.  This report gives investors insight into the strength of manufacturing across the New York region.  Last months reading was a record low.   Mortgage backed securities usually improve with a worse than expected reading.

-          Industrial Production, economists expecting a -1.2% drop after last months -1.8% drop.  This index measures the output of our countries industrial sector.  MBS favor slow moderate economic growth as that leads to less inflation, so mbs usually improve with a lower reading. 

Tuesday

-          Housing Starts, economists expecting 450,000 after last months 466,000 reading.  This report measures the number of new homes starting construction.  Since we have a glut of housing on the market, less new homes being built will help to reduce the number available for sale.  I would like to see this number come in low and mbs should benefit from a lower reading. 

-          Producer Price Index, economists expecting a month over month rise of .4% after last months .8% rise.  Year over year, economists expecting a 0.1% rise after last months -1.3%.  When excluding food and energy, economists expecting a 0.1% in the overall reading and a 3.8% in the year over year.  This report measures the average price level for a fixed basket of capital and consumer goods received by producers.  So, this measures inflation on the producer level and is not as important as consumer inflation reports since producers sometimes do not pass along higher prices to their customers.  MBS usually improve with a lower reading.

Wednesday

-          Consumer Price Index, economists expecting a month over month increase of .3% after last months .3% increase in consumer prices.  Year over year, economists are expecting a 0.0% reading after last months -0.2%.  When excluding food and energy, economists expecting a 0.2% rise in overall prices and a 1.7% year over year increase.  This report measures the average price level of a fixed basket of goods and services purchased by consumers.  So, this report measures inflation on the consumer level and is one of the most important reports we receive monthly.  MBS benefit from lower readings. 

Thursday

-          Jobless claims, economists expecting 654,000 first time claims for unemployment after last weeks 654,000.  This report gives a reading of the number of Americans who filed for unemployment insurance for the first time.  MBS usually benefit from higher unemployment.  With more people unemployed, companies do not need to attract new hires with higher pay which helps keep wage based inflation in check.

-          Leading Indicators, economists expecting a -0.6% drop after last months 0.4% increase.  This report gives investors insight on economic indicators that should lead to overall economic activity.  Higher economic activity generally leads to higher inflation which is a negative for mbs, so mbs usually improve with a lower reading. 

-          Philadelphia Fed Survey, economists expecting a -38.0 reading after last months -41.3.  This report gives investors insight into the strength of manufacturing around the Philadelphia area and mbs favor a lower reading. 

Also this week the Federal Open Market Committee(FOMC) has one of their scheduled meetings taking place.  After these meetings, they announce their decision regarding the Federal Fund rate which is currently at 0 to .25%.  With the current level of the fed fund rate, there is no room to lower but investors will want to read the FOMC statement that is released at the conclusion of the meeting on Wednesday for any indication of what the Fed is thinking about or what actions they might take in the future.  I have read some news articles that the Fed may start to buy treasuries to help drive the yield lower.  This is similar to what the Bank of England has just started and Ben Bernanke hinted at this in the last Fed statement.  The rationale behind this is if the yields on treasuries are lower, it might encourage more fixed income investors to buy MBS since they pay a higher yield than treasuries.  As more investors buy MBS, it drives the price higher which reduces mortgage rates.   Keep in mind, the Fed does not set and cannot set mortgage rates; however, they do have some influence over them.  Our government wants mortgage rates to lower as lower mortgage rates will help to spark our economy.  Lower rates will encourage people who have been thinking about buying a home to get off the fence.  When consumers buy new homes it leads to more furniture buying, applicance buying, etc..  Also, lower rates will allow more people to refinance into lower mortgage rates which results in lower mortgage payments.  With lower mortgage payments, consumers will have more money that they can spend which will help get the economy going.

So far this morning, mortgage backed securities have given back the gains we saw late on Friday.  I suspect that we should see very similar rates today, with 30 year conventional rate mortgages anywhere from 4.75% to 5%.  We did get the release of the Empire State Manufacturing survey and it came in worse than expected at -38.2.  There was no reaction on the release of this report.   Hitting the wires right now is the Industrial Production numbers, and the report shows a month over month decline of -1.4% which is slightly worse than forecasted but so far no reaction in the markets. 

Stock market futures are pointing to another positive day for equities which would make for a 5 day in a row rally.   This will keep pressure on mbs and treasuries from moving higher.  Currently, the benchmark 10 year treasury yield is on the rise continuing its roller coaster ride of late.  On Friday, the 10 year was trading at a yield of 2.88 at close but since has risen to a yield of 2.97.  I suspect we will probably move sideways all day unless the stock market makes a turn into negative territory which will hopefully draw investor money into mbs which drives the price higher and lowers mortgage rates. If you do not have access to live mbs pricing, keep an eye on the Dow.  A big rally will probably pull money out of mbs.  The dow has just opened and is currently up 65 points.  I will get back to you later today with an update.