Market Comment
Mortgage bond prices finished the week flat which held rates steady. We started the week with some upward pressure on rates Monday morning. The Fed countered the selling pressure, and we recovered a bit Tuesday. The inflation data was not rate friendly. Consumer prices rose 0.9% vs the expected 0.4% increase. The core rose 0.9% vs 0.5%. Producer prices rose 1% vs 0.6% and the core rose 1% vs 0.5%. Weekly jobless claims were 360K as expected. The Philadelphia Fed index was 21.9 vs 28.3. Industrial production rose 0.4% vs 0.6% and capacity use was 75.4% as expected. Retail sales rose 0.6% vs the expected 0.6% decline. The Fed “Beige Book” reported a rebounding economy with inflation and supply issues. Mortgage interest rates finished the week with discount points near unchanged thanks to the continued daily Fed MBS purchases.
Looking Ahead
| Economic Indicator | Release Date & Time | Consensus Estimate | Analysis |
| NAHB Housing Index | Monday, July 19, 10:00 am, et | 83 | Moderately Important. A measure of single-family housing. Weakness may lead to lower mortgage rates. |
| Housing Starts | Tuesday, July 20, 8:30 am, et | 1.59M | Important. A measure of housing sector strength. Weakness may lead to lower rates. |
| 20Y Treasury Bond Auction | Wednesday, July 21, 1:15 pm, et | None | Important. Bonds will be auctioned. Strong demand may lead to lower mortgage rates. |
| Weekly Jobless Claims | Thursday, July 22, 8:30 am, et | 425K | Important. An indication of employment. Higher claims may result in lower rates. |
| Existing Home Sales | Thursday, July 22, 10:00 am, et | 5.9M | Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates. |
| Leading Economic Indicators | Thursday, July 22, 10:00 am, et | Up 1.0% | Important. An indication of future economic activity. Weakness may lead to lower rates. |
| 10-year Treasury TIPS Auction | Thursday, July 22, 1:15 pm, et | None | Important. TIPS will be auctioned. Strong demand may lead to lower mortgage rates. |
Auctions
US Treasury bonds do not directly dictate fixed mortgage interest rate pricing however they do have an indirect impact. Both Treasuries and mortgage bonds often track in the same direction, but this is not always the case. There are many times that Treasuries and mortgage bonds move inversely.
Despite the overwhelming size of the US economy, foreign investors can still have an effect on moving the financial markets. When foreign economies struggle foreign investors often purchase US based investments including mortgage bonds. This demand usually causes mortgage bond prices to rise and interest rates to fall. This flight to quality buying is a factor that helped mortgage interest rates remain historically low.
There is a real threat that foreign investors will reduce their U.S. debt holdings. The Treasury auctions this week will be important in determining the current appetite of foreign investors for dollar denominated securities. If this week’s auctions are poorly bid mortgage bond prices could fall pressuring mortgage interest rates higher. The inverse is also true.