Mortgage Rates React to Weak Data

Mortgage rates are now doing another turn as they are moving lower so far today.  Two key June data points were both weaker than forecasts. The reaction sent the 10yr yield down to 2.28% (our critical technical resistance) and MBS prices up 30BPS.  The headline was obvious, consumers are not spending and it goes in line with an article in the WSJ today that reported consumers are continuing to increase their deposits in checking accounts and not spending. Immediately on the knee-jerk comments from economic bulls were mentions that historically retail sales are revised higher than what is originally reported.

The second soft data was June CPI. This is not something that should be pushed aside - the last 4 months of CPI is one of the weakest periods in the last 60 years. Housing, which is a central category, continues to moderate, also coming in at 0.1% following a 0.2% gain in May. Apparel is down for a fourth month in a row. The Fed led by Janet Yellen is losing respectability with her remarks that inflation is just ‘transitory’. She points to import prices increasing as her fallback against the actual data. Imports increasing due to the declining dollar but where the tire hits the street it is weak consumer spending that is keeping prices from increasing - demand less than supply.

The June Retail Sales data was weaker than the market expected. It was weak as the low unemployment rate, and high sentiment levels are not translating to more spending. Inflation - not in this data set. Unlike Thursday's increase in YOY PPI, Consumer Prices are not following the same trend. The Headline YOY Consumer Price Index came in short of expectations and a significant fall off from the pace in May. Drops in airfares, fuel prices, and apparel led the decline. We did see inflation/price increases in medical and rents.

The June Industrial Production reading was stronger than expected and May was revised upward.  The May Business Inventories reading matched expectations.

Economy weak, inflation soft - stocks like it because now there is renewed thoughts that with this morning’s data the Fed will have to re-think any additional increases in the Fed funds rates that had been widely expected in December after the September FOMC meeting puts in motion the Fed’s decision to begin reducing its balance sheet that totals $4.5 trillion - put into perspective, the balance sheet in 2007 was just $800B. In this wacko world, at times bad news is good news.  However, that will not last much longer, although there are some of us that have different views that do not hold much confidence of the timing.  The US and global equity markets are headed to bad times soon. I admit I have been on the bearish side and still am, but what is unsure is how high the US indexes will go before the major turn (and how long it will take). In the meantime, we take markets as they are when analyzing current forecasts.

Mortgage rates are headed lower today on weaker than expected retail sales and CPI.  While this is welcome news, I do not suspect that this is a trend reversal.  Mortgage rates are likely to be a little more volatile than usual through today while the markets digest the weak data. At 11:00AM, we have seen some of the gains retreat and have been holding as the 10yr is now at 2.32% and MBS pricing at +17BPS.