Blowout economic data ... wild swings in interest rates ... and what's going on with mortgage demand
* First, May retail sales were a blowout. Sales gained 1.4% in May, more than twice the 0.6% increase that was expected and the biggest gain in any month since January 2006. Retail sales less autos? Up 1.3% vs. forecasts for a 0.7% gain. Even if you stripe out autos and gas (to account for higher gas prices), you get a gain of 1%.
* The import price index looked ugly from an inflation standpoint. Import prices jumped 0.9% on the headline, three times the 0.3% gain that was forecast. If you strip out petroleum, you get a gain of 0.5%. And if you strip out ALL fuels, you get a 0.4% rise.
* Meanwhile, mortgage demand jumped by 6.6% in the most recent week. The home purchase index came in at 464.70, the highest reading since the beginning of the year. Is the market coming back to life?
Well, my take is that applications likely jumped because borrowers are playing a game of "beat the clock" with interest rates. Last week, 30-year fixed mortgage rates shot up by 26 basis points. That was the biggest single-week increase in more than three years.
Borrowers see that rates are rising, so they're hurrying to get their paperwork in before rates climb even further. If we see purchase loan activity sustain these relatively higher levels -- despite higher mortgage rates -- I'd take it as a sign of potential improvement in the housing market. But I don't think we're there yet.
So what's the impact of all this news on the bond market? Absolute chaos! Bond prices initially tanked on the news, then rallied back to post a slight gain. Now, they're roughly unchanged. Tough to say how this all shakes out -- we're pretty "oversold" but we're also breaking above key yield levels and breaking below key price levels. Expect a real battle royale between the bulls and the bears here.