It is another "dog day" in the mortgage market - featuring thin, listless trading activity. Mortgage interest rates are drifting incrementally higher, driven by slightly stronger-than-expected economic news and improved buying interests in the stock markets.
The mortgage market staggered out of the gate this morning when the Labor Department reported consumer prices rose at a slightly faster-than-expected 0.7% pace in June, although most of the increase was due to soaring gasoline prices. The core measure of consumer inflation remained relatively tame. Some mortgage investors were unnerved when the Labor Department pointed out the June increase in the overall consumer price index was the largest since July 2008. If these same nervous-ninnies would have taken the time to read just a little bit further they would have been largely comforted by the fact that most of the headline gain was created by a 17.3% surge in energy prices - the sharpest month-over-month gain since September 2005. (Currently, gasoline pump prices are roughly 10% lower than the June highs.) Compared to the same period last year, consumer prices fell 1.4%, their biggest year-over-year decline since January 1950 - when prices fell 2.1% y-o-y. Just for the record, pump prices are currently 34.6% lower than they were in June of last year.
The more important core consumer price index, a measure that strips out the volatile food and energy components, rose 0.2% in June, slightly more than the 0.1% gain most analysts were expecting. Core prices compared with a year ago rose 1.7%, the smallest year-over-year gain on record since a matching gain in January.
The "so what" factor behind all this economic mumbo-jumbo is significant - the modest year-over-year gain in the core rate of consumer inflation clearly shows that last year's deflation fears should now be completely over - and there is little chance the economy will overheat in the coming months, especially with consumers likely to remain very frugal, spending only on household essentials. You can "take-it-to-the-bank" that today's sell-off in the mortgage market is probably not being driven by concerns the inflation beast will soon be waking from its slumber and raising its ugly head.
Separately this morning, the Federal Reserve reported industrial production fell in June at the slowest pace in eight months, adding to signs the worst of recession is probably behind us. The 0.4% decrease in output at factories, mines, and utilities was smaller than forecast -- and followed a 1.2% drop in May. Capacity Utilization, which measures the proportion of plants in use, dropped to a new record low of 68.0%. That's another bit of good news on the inflationary front - low utilization rates reduce or eliminate the risk of bottlenecks developing in the production cycle - a condition that many times forces prices of manufactured goods higher.
Diane Swonk, chief economist at Mesirow Financial summed up the current macro-economic environment best when she said, "What we're seeing is the absence of negatives rather than the emergence of positives." In many judgment it is the growing "absence of negatives" that is inducing an increasing number of mortgage investors to take their profits off-of-the-table and move into a defensive position with respect to their pipeline risks as they wait to see if the current "green shots" developing in the economy will grow or fade in the heat of the summer.
On another note (not intended to be a play on words) the Mortgage Bankers of America said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, increased 4.3% during the week ended July 10th. Purchase applications fell 9.4% from prior week levels while refinance application increased 17.7%
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