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Mortgage Market in Review – May 12, 2014

Market Comment

Mortgage bond prices finished the week higher, which pushed rates lower.  The situation in Ukraine and concern over the health of the Chinese economy continued to support bond prices as global investors shed stocks in search of safety.  The US economy imported more goods than it exported resulting in a trade deficit of $40.4B.  Fed Head Yellen cited geopolitical risks and soft housing as areas of concern in her testimony to the House and Senate.  Weekly jobless claims printed at 319k versus the expected 325k.  This was not rate friendly.  Mortgage interest rates fell by about 1/4 a discount point for the trading week despite the continued volatility.

LOOKING AHEAD

Economic
Indicator
Release
Date & Time
Consensus
Estimate

Analysis
Retail Sales Tuesday, May 13,
8:30 am, et
Up 0.7% Important.  A measure of consumer demand.  A smaller than expected increase may lead to lower mortgage rates.
Producer Price Index Wednesday, May 14,
8:30 am, et
Up 0.3%,
Core up 0.2%
Important.  An indication of inflationary pressures at the producer level.  Weaker figures may lead to lower rates.
Weekly Jobless Claims Thursday, May 15,
8:30 am, et
313k Important.  An indication of employment.   Higher claims may result in lower rates.
Consumer Price Index Thursday, May 15,
8:30 am, et
Up 0.3%,
Core up 0.1%
Important.  A measure of inflation at the consumer level.  Weaker figures may lead to lower rates.
Industrial Production Thursday, May 15,
9:15 am, et
Up 0.4% Important.  A measure of manufacturing sector strength.  A lower than expected increase may lead to lower rates.
Capacity Utilization Thursday, May 15,
9:15 am, et
79.1% Important.  A figure above 85% is viewed as inflationary.  Weaker figure may lead to lower rates.
Philadelphia Fed Survey Thursday, May 15,
10:00 am, et
7.8 Moderately important.  A survey of business conditions in the Northeast.  Weakness may lead to lower rates.
Housing Starts Friday, May 16,
8:30 am, et
953k Important.  A measure of housing sector strength.  Weakness may lead to lower rates.
U of Michigan Consumer Sentiment Friday, May 16,
10:00 am, et
83.8 Important.  An indication of consumers’ willingness to spend.  Weakness may lead to lower mortgage rates.

Producer Price Index

The producer price index is a measure of prices at the producer level and is important because it is the first inflation report to be released each month.  Investors are typically able to gain an initial indication of inflationary pressures from the release.  If producer prices are increasing, there is a tendency for producers to pass the increases on to consumers in the form of higher priced goods.  It is important to note that PPI is only a measure of goods, while the consumer price index is a measure of goods and services.  It is possible for the price of goods to remain stable, while the price of services increases.  In this scenario PPI would do little to warn of a change in inflationary pressures, while the CPI report would provide an indication of the inflationary effects of the service component.  This distinction between the two reports shows why most analysts view the CPI as a more accurate indicator of inflation.  Nevertheless, market participants still gain valuable insight into potential volatility in the financial markets from the PPI release.  Be cautious heading into the inflation data this week.
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