Mortgage Rates Move Lower

Tame inflation data, strong demand for the Treasury auctions, and a lack of surprises from the Fed were all positive for mortgage markets, and mortgage rates ended the week lower. As expected, the Fed held the fed funds rate steady on Wednesday, and its statement contained few changes. The Fed suggested that economic activity is "leveling out", rather than continuing to decline, and the Fed expects that inflation will remain subdued due to unused capacity in the economy. Of note, the Fed decided not to increase its $300 billion Treasury purchase program, which will end in October. No changes were announced for the $1.25 billion mortgage-backed securities (MBS) purchase program, which is set to conclude at the end of the year. Mortgage rates are largely determined by MBS prices, and the added Fed demand for MBS has helped keep mortgage rates low. Investors will soon need to hear what the Fed plans to do with the MBS purchase program. The direction the Fed chooses could have a significant impact on mortgage rates later in the year. The economic data released during the week was favorable for mortgage rates. The July Consumer Price Index (CPI) inflation data was unchanged from June, and Core CPI, which excludes food and energy, rose at a tame 1.5% annual rate. Current inflation levels are not a cause of concern for investors. July Retail Sales dropped slightly from June. Excluding autos, the results fell well short of expectations.

Also Notable

• July CPI inflation showed the largest annual rate of decline in 59 years
• Second quarter Productivity rose at the fastest pace in nearly 6 years
• Geithner stated that plans to overhaul financial market regulation were on track
• The Fed purchased $20 billion in agency MBS during the week ending 8/12

Average 30 yr fixed rate:
Last week: +0.35%
This week: -0.25%
Stocks (weekly):
Dow: 9,250 -150
NASDAQ: 1,975 -25

Week Ahead

Next week's calendar of economic events will be relatively light. Additional inflation data will be revealed on Tuesday in the Producer Price Index (PPI) report. PPI focuses on the increase in prices of "intermediate" goods used by companies to produce finished products. Housing Starts will also be released on Tuesday, and Existing Home Sales will come out on Friday. The two regional manufacturing indexes will round out the schedule. In addition, the Treasury will announce the size of the upcoming auctions on Thursday.

Mortgage Time courtesy of MBSQuoteline.com

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