Tuesday, September 15, 2009

Mortgage interest rates were smacked around pretty good this morning as investors reacted to stronger-than-expected August Retail Sales figures and a slightly stronger read on the core producer price index.


The Commerce Department said total retail sales climbed 2.7% last month, the biggest monthly advance since January 2006, after declining by a revised 0.2% in July. Motor vehicle sales surged 10.6% in August on the back of the government's "cash for clunkers" program, which gave consumers up to $4,000 as an incentive to swap aging gas-guzzlers for new, more fuel efficient models. Early indications are that post "clunker" auto sales are not nearly as strong - surprise, surprise, surprise.


Excluding motor vehicles, sales jumped 1.1% in August after falling 0.5% in July. Drilling down through the data to the component that excludes autos, gasoline and building materials - the retail group the government uses to calculate gross domestic product figures for consumer spending - sales increased 0.7%, after a 0.3% gain in July. Heavy discounting by retailers in ramped up "back-to-school" sales campaigns probably contributed heavily to the August "core" retail sales gain.


The "so what" factor behind all the statistical mumbo-jumbo surrounding the August retail sales report is that it will take several more months of improved retail sales figures before calmer, cooler heads will join the bandwagon of those currently celebrating the return of the consumer - the driving force behind 70% of all domestic economic activity. In the "ankle-bone-is-connected-to-the-shin-bone" format of sustained economic growth -- jobs come before accelerating consumer spending - and the story from the labor market currently remains bleak.
Separately, the Labor Department reported producer prices rose twice as much as expected in August - driven by the biggest surge in gasoline prices in 10-years. Prices paid at the farm and factory gate jumped 1.7% last month but are still 4.3% lower than last year levels. The upside surprise was due to higher than expected inflation for food and energy, as well as a surge in light vehicle prices, which lifted core producer prices 0.2%. Core producer price inflation excluding autos has declined quite steadily over the last year. Given the current excess slack in manufacturing -- overall core inflation is apt to slow again once vehicle inflation cools. That should in turn contribute to low inflation at the consumer level.


For the most part the only thing all the macro-economic chatter is good for is to look backward in an attempt to explain what happened. To successfully manage pipeline interest rate risk it has been my experience the view has to be forward looking. From that perspective it is becoming abundantly clear that in order for the mortgage market to regain the drive toward lower interest rates -- it will likely take a sell-off in the stock market and/or some seriously weak economic data - things the current market environment is woefully short of.