Mortgage Rate Forecast–May 12, 2011

Locking Stance:  LOCKING      Mortgage Bonds:  -3bp

Mortgage backed securities had a nice day yesterday, but not nice enough and the 200-day moving average still repels their advances. 

Economic data today started with Jobless Claims coming in at 434K, slightly above the 430K expected, and that brings the 4-week moving average up a little more to 436.75K.  The weekly numbers are a nice rebound from the prior week, but still do not offer much comfort.  Retail Sales came in at 0.5%, a hint below the 0.6% expected.  March numbers were revised higher from 0.4% to 0.9%.  The numbers were inline at 0.6% for Retail Sales less autos.    Despite a soft number for ex-autos/ex-gasoline sales, the level of activity is still good taking into account upward revisions for March and three consecutive strong gains each of the months in the first quarter.  There likely is some slowing in sales from the impact of higher gasoline prices, but at this point, the effect appears to be modest.  And the Producer Price Index (PPI) came in at 0.8% versus 0.6%, not a good sign for mortgage rates, though this was somewhat expected after data earlier in the week suggested the same.  Core PPI came in at 0.3%, just above the 0.2% expected, which was not anticipated based on earlier data.  Tomorrow will see the Consumer Price Index (CPI) numbers and that may hit the market hard.  We also have to deal with today’s 30-year T-Bond Auction, which hopefully will go at least as well as the 3-year and 10-year T-Note Auctions, but this morning’s inflation numbers may put pressure on the auction.

As for Fed speeches, today has a couple, starting with Charles Plosser and followed by Ben Bernanke.  Plosser stated that there is no point in ending QE2 ahead of the announced schedule.  He stated that when accommodation is exited, it is still going to be a long time before monetary policy becomes tight.  He described first quarter weakness as "temporary" and anticipates second half growth to be moderate based on current fundamentals.  Bernanke gave brief comments similar to recent remarks on financial reform.  He avoided comments on current monetary policy, instead focusing on the need for addressing the too-big-to-fail problem. 

What does this mean for Mortgage Rates?  Mortgage rates are holding steady, but any improvements continue to be thwarted, keeping the short-term outlook favoring mortgage rates rising, at least a little.  The long-term outlook remains in question still, and likely will for some time, but the “forces” favor rising mortgage rates as well.

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