Current Mortgage Rates Poised for Tipping Point?, July 15, 2011

Something big is brewing for mortgage rates…a sharp decline…a sharp increase…but which one? Over the past several weeks we have seen rates move sharply in each direction as the US economy sputters and the international and domestic debt crises rage on.  But lately we seem to be moving toward a tipping point.  Consumers seeking a mortgage for a home purchase or refinance should pay close attention to the economic news of the day.  Today that news includes reports on inflation, manufacturing and consumer sentiment.  I expect rates to hold tight today, perhaps with slight upward move this morning, but we are moving closer to a tipping point.

The Consumer Price Index declined overall but saw an increase in its core rate that excludes volatile food and energy costs.  This result mirrored yesterday’s Producer Price Index and presents a troubling headwind for the economy—inflation.  Inflation tends to push mortgage rates higher, yet slow economic growth tends to push mortgage rates down.  With these most recent events taking advantage of recent declines in commodities and oil, a reacceleration of prices in this area, which does appear to be occurring could yield meaningfully higher inflation.

Today’s Empire State Index that measures manufacturing activity in the New York Federal Reserve region was expected to show a major bounce back from last month’s major decline.  But the result still was negative, suggesting the manufacturing sector in the Northeast US continues to weaken.  What the data may be illustrating is that a structural change is taking place even within the domestic manufacturing sector in which production is shifting to more manufacturing intensive and less costly areas of the country.  It makes sense if you think about it…in a weak economy move your production to areas with lots of skilled workers, and less costly tax and regulatory frameworks.

Industrial production in the US is stable.  Despite the losses in the manufacturing sector in the Northeast discussed above the overall production at facilities across the US continues to modestly improve.  As stated above our economy is undergoing a restructuring.  US companies are making very well thought out decisions about what to do and where to do it.  As the recent spate of earning reports from US companies points out, the focus has been on improving their balance streets, improving their productivity and positioning themselves for potential growth or potential disaster.  What do all of these have in common—keeping employment levels as low as possible.

Consumer sentiment is released at 10 AM this morning.  Expectations are for a slight decline in this measure of the confidence of consumers in the economy.  If the report meets expectations then no real impact on mortgage rates will be seen.