Wednesday, February 16, 2011

The Labor Department reported this morning that inflation pressures at the wholesale level shot up again in January as energy and food costs continued to rise. The seasonally adjusted 0.8% gain in January follows a 0.9% gain in December and marks the seventh consecutive monthly increase in raw material prices for manufacturers. Even more of a concern than the surge in the headline producer price index, at least from a mortgage investor's perspective, is the fact that the core producer price index, a value which excludes the volatile food and energy costs, spiked 0.5% higher last, marking the largest month-over-month gain for this component since October 2008




Up to this point in the recovery from the Great Recession producers have not had the pricing-power necessary to push through much, if any, of the increases in their raw material costs to the consumer. That story could change quickly. Investors will scrutinize the details of tomorrow morning's January consumer price index (8:30 a.m. ET) for any sign that inflation pressures on Main Street are ramping up.



Most analysts believe the core rate of the consumer price index (a value excluding the more volatile food and energy costs) for January will not post a gain of more than 0.1%. If so, look for mortgage interest rates to move sideways to perhaps slightly lower - but be ready - a core consumer price index of 0.2% or higher will likely send mortgage interest rates sharply higher before the day is over. And here is the "kicker" - even if tomorrow's core rate of inflation posts a reading of 0.1% -- fixed-income investors will likely begin to anticipate an upward trajectory for next month's core consumer price index value.



As they do every Wednesday, the Mortgage Bankers of America have released their Mortgage Application Survey data for the week ended February 11th. The overall index fell 9.5% for the week with purchase applications down by 5.9% and refinance requests lower by 11.4%. The average national contract rate for 30-year fixed-rate mortgages finished at 5.12%, down by 2 basis points from the prior week, up by 35 basis points from four weeks ago, and up by 17 basis points from the year ago mark. Six out of every ten applications taken last week were refinance loan requests.