RATES IMPROVE SLIGHTLY DESPITE POSITIVE ECONOMIC DATA
Mortgage interest rates improved slightly on the week despite generally positive economic data. Economic data better than expected included November Industrial Production and Capacity Utilization, November Building Permits, November Leading Economic Indicators, and the Philadelphia Fed Business Index. November Housing Starts were in line with expectations. On the inflation front, the November Consumer Price Index (CPI) was on target, up 0.4%. Core CPI, excluding the food and energy components, was unchanged on expectation that it would be up 0.1%. Inflation at the wholesale level, though, was up much more than expected. The November Producer Price Index (PPI) was up 1.8% on expectations that it would be up 0.8%. Core PPI, excluding food and energy, was up 0.5% on expectations that it would be up 0.2%. Economic data weaker than expected included the December Empire State Manufacturing Index and weekly jobless claims.
Some year-end holiday weeks have active markets, but these next two weeks figure to be quiet. We’ll get some hints about Christmas retail sales (weak helps rates, strong hurts, but the results will be distorted by discounts). Unlike last year, with a new Fed rescue program every other day, and its pending purchase of MBS, government now is trying to to withdraw. Also, there is a shortage of new crises. The only one that might break involves weaker Euro-zone economies that may be forced to leave the Germany-uber-strong euro currency; our rate improvement this week was directly traced to Greece’s difficulty.
All of the big stuff comes after the New Year. In order, payrolls for December, more measures of eceonomic recovery (or not), and new financial-system losses, especially in real estate. As early as January, the durability of recovery in China and emerging nations, and the state of Japan’s finances will all be in play (as always, panic helps rates, calm does not).
Last, the supply of credit or its absence will matter a lot for mortgages. If the Fed stops buying MBS in March, as planned, it’s hard to see a cheap supply from any other source, and hard to imagine housing improvement if rates rise to where they were before the Fed’s helping hand last December.