The economy appears to have shrugged off August's credit market turmoil and is continuing to expand.  This pushed mortgage rates higher last week as market players move money into stocks and hope to capitalize on the Dow Jones rally.

After the Fed's last meeting, the central bank lowered the Fed Funds Rate by 50 basis points, or 0.50%. 

At the time, the economy was widely viewed to be in, or entering, a recession. 

• The August jobs report showed a net loss of jobs
• Billions of dollars in value were wiped each day in the credit markets
• General economic indicators showed weakness

Since the last Fed meeting, though, the data is showing the same signs of explosive growth that it did from 2004-2007.

• The August jobs report was revised to a net gain of 89,000 and showed 110,000 new jobs in September
• Consumer spending grew by three times the expected amount in September
• Consumer confidence surveys show that the average consumer is optimistic

Could the Fed have reduced rates too far, too fast?  Some traders think so because these "strength" points are causing the stock market to rally and retake its position north of 14,000. 

Some of that money is coming from the bond market.

This is bad for mortgage rates, of course, because mortgage rates are determined by the price of mortgage bonds.  As demand falls for mortgage bonds, so does the price.  And, as price falls, the rate of return increases.

The American economy's strength is causing mortgage rates to rise.

This week, government groups will release data to give insight on the nation's manufacturing strength, housing growth, and "cost of living" increases.  The stronger these data points are, the more money that will flow to stocks.  That should pressure mortgage rates to move higher.

If the data shows weakness, expect mortgage rates to fall.

(Image courtesy: Wall Street Journal Online)