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Mortgage Rates Bobble

The Federal Open Market Committee gave bond traders a reason for optimism by suggesting that interest-rate hikes could slow or even cease in the undefined 'future.' This was enough to spark a big rally in U.S. Treasury securities, which sent prices soaring and their yields, which move in the opposite direction of prices, to their lowest levels since late November. But bullish numbers on manufacturing halted the surge and yields are moving back up. Mortgage lenders who base their rates on Treasury yields were able to edge rates down, but increased yields may force them back to previous levels. Even though the Fed raised short-term interest rates by 25 basis points to 4.25 percent, Treasuries cheered the statement, which said further increases will be made with the intention of keeping economic growth and price stability 'roughly' in balance. But two days later a mound of data showing strong growth in manufacturing turned Treasuries around. Industrial Production in November rose by a higher-than-expected 0.7 percent, while production in October was revised upward to 1.3 percent. In addition, capacity utilization - the percent of mines, factories and utilities in production - rose to 80.2 percent. The NY Empire State index on December manufacturing conditions hit a year-high 28.7 as new orders climbed to 30. The weightier Philly Fed survey for the Middle Atlantic States, however, edged up to 12.6 and featured a decline in prices paid.

The Consumer Price Index (CPI), usually a market-mover, exerted only slight pressure in spite of a 0.6 percent drop in November. The decline - the biggest in 56 years -- was pegged to an 8-percent slide in energy prices, which included a whopping 16 percent drop in gasoline. The CPI core, which eliminates volatile food and energy prices, rose by an in-line 0.2 percent. Retail Sales for November edged up by a weaker-than-expected 0.3 percent, but when autos were excluded, sales fell 0.3 percent. Business Inventories in October were 0.3 percent higher, while sales rose 0.8 percent, suggesting increased production may be warranted.

Mortgage applications slowed for the week ended Dec. 9, according to the Mortgage Bankers Association. Purchase applications were down 3.5 percent, while refis sank 5.7 percent. The rate on the 30-year fixed-rate mortgage (based on zero discount points) is just below 6.0 percent, while the 15-year fixed-rate mortgage slid to 5.5 percent. The rate on the volatile one-year adjustable-rate mortgage climbed to 4.375 percent.

The week before Christmas features a number of influential economic releases for November including the Producer Price Index, which checks for inflation at the wholesale level, Housing Starts, New Home Sales, Personal Incomes/Outlays and Durable Goods Orders. The final revision of third-quarter Gross Domestic Product also is on tap. If the reports come in target and there are no signs of growing inflationary pressures, Treasuries will likely trade in a narrow range, allowing mortgage rates to do the same.

Carolyn Siegel

carolyn @ interest.com