Following disappointing economic news, mortgage bonds rallied higher this morning. Retail Sales continued their path lower, with September’s figure coming in at a tepid +0.1%. Further, the prior month was reduced lower from +0.2% down to 0.0%. When stripping out automobiles and gas, this month’s figure was reduced down to 0.0%, which was much lower than the +0.3% anticipated by the market. Overall, retail sales remain very weak. This falls in-line with Warren Buffet’s company’s recent decision to limit its exposure to companies tied to consumer sales. Since consumer spending is the backbone of the US economy, this doesn’t bode well for the current direction of where things are heading.
The Mortgage Bankers Association reported that purchase Mortgage Loan Application volume for last week declined sharply, erasing last week’s gain. The figure reported indicated a drop by 34% from the week prior. It is important to note that the prior week’s figures were likely exaggerated due to the implementation of TRID, with lenders trying to push applications into their system ahead of the change. Overall, this report is extremely volatile on a week to week basis. We will need to get a few weeks outside of the implementation of TRID to get a more accurate view of purchase activity going forward.
Lastly, the Producer Price Index (PPI) for September came in at a very weak reading of -0.5% last month and -1.1% on a year over year basis. The Core Rate, which strips out food and energy prices, moved lower by -0.3%. The year over year Core Rate dropped from +0.9% down to +0.8%. All of these figures were far below the market’s expectation, and show that inflation on the wholesale level continues to be non-existent. However, since this doesn’t always translate to inflation levels on the consumer level, we will have to wait and see what tomorrows Consumer Price Index (CPI) shows is happening on the consumer level.
Mortgage bonds remain at the top of a sideways trading channel. With bonds now being at the top of the range, the safe play will be to lock in while at these lofty levels. If tomorrow’s CPI report shows low levels of consumer inflation, we may see bonds break out of the channel to the upside. However, since breakouts are rare, we can only go off the information we have at this time. If you choose to float, do so carefully.