The mortgage market "took-one-on-the-chin" this morning as a surge in auto and gasoline sales during the month of June boosted retailers' performance beyond expectations -- while a measure of inflation soared by twice as much as projected -- bolstering hopes the economy is finally beginning a modest recovery. 

The Commerce Department said sales at U.S. retailers rose 0.6% from month earlier levels - well ahead of market expectations for a sales gain of 0.4%.  A separate report from the Labor Department showed producer prices jumped 1.8% last month - double the projected gain of 0.9%. 

The initial swoon in the mortgage market was muted a bit by the detail contained in each these reports. 

Drilling down further into the data investors discovered that excluding autos and parts, which collectively recorded a 2.3% gain, "core" retail sales were up a modest 0.3% last month, short of the consensus estimate calling for a gain of 0.5%.  Excluding both autos and gasoline, sales were down 0.2% -- marking the fourth consecutive decline for this particular economic metric.  The bottom line here is that retail sales are trending about flat - and in this case flat is an improvement from the steady month-over-month declines of the second half of last year.  Consumers will likely remain very conservative with their spending in the face of weak labor dynamics and dramatically reduced access to credit -- so further gains for this measure of economic activity will likely remain muted in coming months. 

The June producer price index -- an index which measures prices received by farms, factories and refineries -- recorded it steepest monthly gain since November 2007, driven by sharply higher gasoline prices during the month. In this case, stripping out the more volatile food and energy prices didn't help much.  The so called core produce price index posted a gain of 0.5% -- a value notably higher that the 0.1% gain most market participants were expecting.   

The statistical correlation between today's Producer Price Index and tomorrow's Consumer Price Index are not as tight as you might assume - but it is close enough to make mortgage investors a bit more edgy than normal - a condition that will make it difficult, if not impossible for mortgage interest rates to move to notably lower levels today.

Today's conforming 30 year fixed rate is at 5.25%.