Locking Bias

The good news, bad news cycle of economic reports hit the wires this morning, starting with PPI (Producer Price Index) showing that manufacturing prices moved higher than anticipated last month.  While the market was looking for an increase of 0.3%, the actual figure showed an increase of 0.4%.  PPI less food and energy came in at .02%, which was in line with estimates.  As we have all noticed, energy costs have skyrocketed the past several months, with consumers paying more at the pumps for gas than they have in years.  This increases the cost of transportation of goods and services, which often times will be passed on to the end user.  As this happens, inflation will jump higher, as people will be paying more at the stores for goods they purchase.

Industrial Production in the month of June was up 0.2%, which is below expectations of 0.4%.  Last month’s figure was also revised lower from 0.6% down to 0.5%.  Capital Utilization was unchanged at 79.1%.  This was below expectations of 79.2%.  Although approaching a healthy level, these numbers show that manufactures of goods are not running at capacity.  As they reach higher levels of production, they often raise prices to slow the flow which can be a source of inflation, as the increased prices are typically passed on to the end user.

Mortgage purchase applications were reported to be down 8% last week.  Since this is an indicator of future home purchase closings, it is not a great sign of a strong August / September buying season.  With warm weather and stable interest rates, the stall in purchase applications aren’t easily justified.  Given that we are in the historical strong months of home buying, purchase applications should be more impressive at this point.

Mortgage bonds continue to struggle.  After breaking through multiple layers of support, they are currently hanging by a thread at the 102.00 mark.  With the stock market again moving higher, it will be difficult for mortgage bonds to perform well today.  It is very possible that we will see a break below even these levels, which will likely put mortgage bonds another 40 basis points lower.  This equates to nearly 1/8% of an interest rate increase potential.  We are going to maintain a locking bias until such point that we see mortgage bonds muster the strength to make a run higher.