Will Mortgage Rates Freak Out on Friday the 13th?, August 13, 2010

Mortgage Rate Trend Direction:       Down

Economic Reports/Rate Impact:      Consumer Price Index, 8:30 AM ET, Moderate Rate Impact

                                                                Retail Sales, 8:30 AM ET, Moderate Rate Impact

                                                                Consumer Sentiment. 10:00 AM ET. Low Rate Impact

Key News:                                             European Gross Domestic Product Report

Summary

Yesterday was a wild day in the mortgage-backed securities market as trades initially sent prices higher into new record territory.  When worse than expected initial Jobless Claims was reported it appeared mortgage rates could be headed for a big improvement, yet it was not to be.  Contrary to market norms, the MBS market turned negative despite the negative economic news causing mortgage pricing to rise from the new record levels.

Today looks to be much calmer in the markets with three reports expected that are not anticipated to contain any surprises.  Reaction to positive economic news from Europe may also influence US markets today.  Therefore, mortgage rates are expected to begin the day neutral to lower this morning from their closing levels on Thursday.

Impact of economic reports

The Consumer Price Index was released this morning and showed some inflation in the price of consumer goods.  Markets took this as a positive sign, since concerns recently have centered on the possibility of deflation occuring.  Also, released were retail sales figures and the consumer sentiment index.  As expected US consumers are spending cautiously and remain concerned over the longer term prospects of the economy.  However, their mood did improve from last month's reading, providin some hope that future consumer spending might increase, particularly during the back-to-school period.

Impact of international or political events

European Gross Domestic Product figures were released today which supported the notion that the economy was much stronger in Europe than in the US.  Germany and France in particular saw strong growth during the 2nd quarter, but forecasts for the balance of 2010 indicate that a slowdown is likely.  European unemployment rates are, much like in the US, at multi-year highs. 

As is often the case, the economic cycles in the US, Europe and Asia move in opposing directions.  However, there is mounting evidence that all three major economic regions are likely to be in slower growth stages of their economic cycles during the later part of this year.  While that poses some risk to the global economy, it also likely means that all regions are positioned to gradully grow out of this period of diminished economic activity.  That is a good thing from the standpoint of long-term, sustainable growth.  

Week in review

In my weekly review this afternoon I will aslo consider the impact on the mortgage market of further "quantitative easing" by the Federal Reserve.  Check back for that discussion.