The epic battle of the week between economic weakness and inflation rages on today. Yesterday inflation had some wind taken out of it's sails and Mortgage Backed Securities (MBS) advanced nicely. As we discussed, yesterday's PPI data was the only major inflation report of the week, and the rest of the data would speak to the other factors of the economy.
I had said earlier that even though inflation may be high, that other economic reports would continue to disappoint, and that if we could make it through Tuesday on a fairly positive note, that the rest of the week could be great. So far, so good!
The economic data is certainly helping: new home sales are the lowest in 13 years, durable good orders fell by 5.3% (almost double expectations), and mortgage applications are down by a good margin.
Currently, Bernanke is testifying before congress. MBS are doing well with prices improved by roughly 1/3 over yesterday's close.
HOWEVER, be warned that the rest of the morning can be volatile. Many lenders will wait until the end of the testimony to release rates. Much can happen between now and then. For instance, the federal regulator for Fannie and Freddie just announced that their investment caps would be lifted, allowing them to buy more loans. As this is somewhat optimistic for those that still believe we can "skirt a recession" (scoff!), MBS have responded immediately after the news and have fallen a bit from their highs of the day. The selling is not to be considered drastic at this point and will hopefully moderate in a few moments.
At any rate (no pun intended), the benefits of floating this morning outweigh the risks. I will update you if that sentiment changes.