Weekly Mortgage News

Market Comment - Week of March 14th, 2011

Mortgage bond prices rose last week helping mortgage interest rates improve. The US Treasury auctions generally showed decent foreign demand for US debt instruments. Oil prices fluctuated which continued to cause market volatility. Weekly jobless claims came in higher than expected which sent mortgage interest rates lower as stocks struggled. Retail sales came in as expected while the inflation component of the Michigan consumer sentiment survey shocked to the upside. Despite the mixed data mortgage bonds ended the week better by about 1/2 of a discount point.

The Fed meeting Tuesday will take center stage this week and set the tone for the days ahead. The inflation data that follows has the potential to cause mortgage interest rate volatility.

Producer Price Index

The producer price index is a measure of prices at the producer level and is important because it is the first inflation report to be released each month. Investors are typically able to gain an initial indication of inflationary pressures from the release. If producer prices are increasing, there is a tendency for producers to pass the increases on to consumers in the form of higher priced goods. It is important to note that the PPI is only a measure of goods, while the consumer price index is a measure of goods and services. It is possible for the price of goods to remain stable, while the price of services increases. In this scenario PPI would do little to warn of a change in inflationary pressures, while the CPI report would provide an indication of the inflationary effects of the service component. This distinction between the two reports shows why most analysts view the CPI as a more accurate indicator of inflation. Nevertheless, market participants still gain valuable insight into potential volatility in the financial markets from the PPI release. Be cautious heading into the inflation data this week. Caution is key.

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