Friday, May 15, 2009

The few traders at their desks today made a feeble attempt at ramping up activity levels following this morning’s release of the April Industrial Production and Capacity Utilization report – but it didn’t take long before they gave that effort up -- and returned to their Sudoku puzzles (the easy ones).

Government data on national industrial output suggested the economy’s rate of deterioration was slowing, a perspective that tends to dim investors appetites for low-risk, low-return investments like mortgage-backed securities. Industrial production fell 0.5% in April, dropping for the sixth consecutive month but at a more modest pace than in recent months. The amount of industrial capacity in use dropped to a record-low 69.1%.

The “so what” factor behind all this mumbo-jumbo is that immediately after the data hit the wires -- media sources and some traders tried to talk up this news as a sign the bottom in the manufacturing sector is at hand. These tambourine shakers went on to suggest activity levels in the manufacturing sector will quickly swing into positive territory as recent massive inventory draw-downs must be rebuilt. The knee-jerk selling pressure in the mortgage market quickly abated as calmer, cooler heads pointed out the trend for industrial production is still pointing sharply downward.

In other news of the day consumer prices were unchanged in April, as expected, but the core rate of inflation (a value that excludes the more volatile food and energy components) was up a stronger than expected 0.3%. Most analysts had anticipated core inflation would creep higher by 0.1%.

Both of today’s reports were slightly out-of-line with market expectations -- just enough to cause investors to choose to lackadaisically nudge mortgage rate sheet prices a fraction lower.

Looking ahead to next week the economic calendar is virtually void of any meaningful data. Tuesday’s housing starts and building permit figures for April is the only major report scheduled for release. Expect trading action in the stock markets to have a strong impact on the trend trajectory of mortgage interest rates over the course of the coming five trading sessions. Falling stock prices will tend to support steady to fractionally lower mortgage interest rates while rising stock prices will likely push mortgage interest rate incrementally higher. The mortgage market will close early at 2:00 p.m. ET on Friday, May 22nd and will remain closed on Monday, May 25th for the Memorial Day holiday.