Mortgage investors are squaring up positions and otherwise attempting to look busy as they await the release of the pivotal June retail sales report tomorrow morning at 8:30 a.m. ET. 

The expected 0.4% gain in the headline sales figure will likely be largely discounted as a function of volatility related to a temporary price surge at the pump.  The real catalyst for a potential change of direction for mortgage interest rates will be the component of the report that excludes auto sales.  

At this juncture, the weekly retail sales data seems to be indicating that while the consumer is active - most purchases are being made on heavily discounted staples - rather than on higher-end discretionary items.  Against this backdrop it seems highly unlikely the American consumer will have shrugged off the "fear-factor" attached to the weakest labor market since World War II -- to return to living beyond their means.

The majority of market participants have currently "priced-in" expectations for the core retail sales figure (ex. auto) to show a gain of 0.5%.  If the actual number matches or falls below this threshold -- the mortgage market will likely benefit from a "flight-to-quality" buying spree as capital from the stock markets flows back into the relative safe haven of Treasury obligations and mortgage-backed securities.  If such a condition were to develop -- it should prove supportive of steady to perhaps fractionally lower mortgage interest rates.

There are, of course, those who suggest the ex. auto component of the June retail sales report will exceed the market's current expected threshold for a gain of 0.5%.  If this event were to occur, the stock market would likely rally sharply in anticipation of accelerating economic growth in the second-half of the year.  A stock market rally will almost certainly drag mortgage interest rates higher as well.  As I write, this potential outcome is viewed by most investors as unlikely.

Today's conforming 30 year fixed rate is at 5.125%.