Houston's Rate Sheet

Rate Watch

Thanks in large part to the previous week's employment report we got some lower mortgage rates last week. Freddie Mac’s weekly survey reported that rates on 30-year fixed-rate mortgages averaged 6.62 percent, down from 6.67 percent the previous week, which had been the highest level in nearly four years. It marked only the second rate decline in the past 11 weeks. Other popular programs followed. Rates on 15-year fixed-rate mortgages fell to 6.23 percent, down from 6.26 percent, and rates on one-year adjustable rate mortgages were also down for the week, falling to 5.63 percent. They had been 5.68 percent the previous week.

Although much of last week’s movement was caused by items we discussed in last week’s Houston Rate Sheet. The week was at least interesting. Fed Chairman Ben Bernanke spoke last Monday at a conference held by the American Bankers Association. Bernanke expressed a strong personal concern about the recent rise in inflation, and expressed a strong commitment to slaying the inflation beast. Investors interpreted the comments to mean that the Fed will risk slower economic growth to offset inflation. This led to a falling stock market, but not surprisingly the bond market stayed firm. Since, every up tick in inflation destroys of the value of bond securities, bond investors are especially concerned about the topic. So even though the Fed might raise rates in their next meeting and cause rates to move slightly higher, bond investors know that the integrity of their investment's value has a champion in the Fed and Bernanke.

This leads us to the economic calendar ahead. Inflation will be the data point of discussion as the Producer Price Index and Consumer Price Index are released respectively on Tuesday and Wednesday. Almost without exception, higher inflation leads to higher interest rates, and PPI and CPI are the most widely watched indicators of inflation. PPI focuses on the increase in prices of “intermediate” goods used by companies to produce finished products, while CPI looks at those finished goods which are sold to consumers. These two reports will be a major indicator in judging the effects of the previous Fed rate hikes.

Another big release this week will deal with Retail Sales. Consumers account for about 70% of economic activity, and this report is a major indicator of spending by consumers. Industrial Production, a broad measure of business related economic activity, will be released on Thursday. Rounding out the full schedule will be regional manufacturing reports and Consumer Sentiment.

The next couple of weeks leading up to the Fed meeting on June 28th are expected to be volatile, so borrowers should lock their rates at their earliest possible convenience. This is especially true today. No one wants to be on the wrong side of a negative inflation report.

posted by Vincent Biondillo @ 8:35 AM