Friday, October 15, 2010

The Commerce Department reported this morning that retail sales rose a stronger-than-expected 0.6% in September, lifted by big ticket items like autos, electronics and appliances. The August figure was revised higher as well to show a gain of 0.7% versus the 0.4% gain originally reported. Excluding autos, September sales were up 0.4%, essentially matching the consensus estimate. Consumer spending accounts for roughly 70% of the nation's economic activity, so an improved picture for overall third-quarter performance will tend to limit the ability of mortgage interest rates to make a notable move to lower levels as investors anticipate a rising demand for capital to finance the prospect of budding new business opportunities.




In a separate report the Labor Department said their September Consumer Price Index showed inflation rose at a slower-than-expected pace last month. The overall consumer price index rose just 0.1% while the core rate, a value which excludes the more volatile food and energy price components, remained unchanged for the second straight month.




This low inflation environment is bothersome for Fed Chairman Bernanke and a majority of his fellow central bankers. Mr. Bernanke, speaking at a conference sponsored by the Boston Federal Reserve Bank this morning, said high unemployment and low inflation point to a need for further easing of monetary policy. His comments removed any remaining doubt among credit market participants that another round of economic stimulus from the Fed is on the way. The Fed is broadly anticipated to formally announce the deployment of "QE2" at the conclusion of the two-day Open Market Committee meeting on November 3rd. The dollar size of the Fed's commitment is still vague and many analysts, including the Fed Chairman himself, question the likely effectiveness of this new program in regard to making a dent in the nation's stubbornly high jobless rate.




The one thing nobody doubts is the Fed's intent to do as much as is required to drive the inflation rate at both the producer and consumer level higher - viewing the achievement of that objective as tangible proof the gears of economic growth are once again beginning to turn. While there are those who question how much "bang-for-the-buck" in terms of economic growth the Fed will actually recognize for their effort - there are few who doubt rising inflation pressures will push mortgage interest rates higher.



Looking ahead to next week the economic calendar is populated with second-tier reports ranging from Monday's September Industrial Production and Capacity Utilization figures, Tuesday's September Housing Starts and Building Permits stats, and Thursday's Initial Jobless Claims data. With so little to "chew on" - it is likely the trend trajectory of mortgage interest rates will be largely governed by trading action in the stock markets. Higher stock prices will tend to put upward pressure on mortgage rates while lower stock prices will probably foster steady to perhaps fractionally lower rates.