Stocks are up on the week (S&P 500 now at 1303) on better-but-still-weak homebuilder confidence (below), better Goldman Sachs earnings, and optimism that Greece will reach a debt deal with private investors as talks resume today.

Mortgage bonds—namely the 3.5% coupon most lenders use to price rates—are slightly off nosebleed levels, down 11 basis points to 103.02 as MBS investors try to hold line in this headline driven market. Rates rise when mortgage bonds sell, but we’d need this selloff to expand 10 or more basis before lenders hike rates.

This Greek debt talks will be the first big test to see if 2012 will officially continue the same slog we saw throughout 2011 with stocks rallying (and bonds selling) on the least bit of good U.S. economic data and/or optimism on EU debt crisis resolution, then reversing. The definition of a passed test is if there’s a definitive agreement on who will take (and commit to) losses.

Stay tuned, and here’s your data and chart rundown…

PPI: Wholesale Inflation (December 2011)
-PPI, Month/Month change -0.1%
-PPI, Year/Year change +4.8%
-Core PPI (less food & energy), Month/Month change +0.3%
-Core PPI (less food & energy), Year/Year change +3.0%

-The overall data shows that food and energy prices have been volatile. From a macroeconomic point-of-view core is more important and core, while a bit too high for the present state of the economy (and versus expectations of 0.1% monthly), is fairly tame. Mortgages selling a bit this morning on the news, which will push rates up if it holds.

MBA Mortgage Applications (week ended 1/13/2012)
-Purchase Index, Week/Week Change +10.3%
-Refinance Index, Week/Week Change +26.4%
-Composite Index, Week/Week Change +23.1%
-The gigantic gain is a data fabrication due to the fact that the previous week contained New Year’s Day.

National Assn of Homebuilders (NAHB) Confidence Index (January 2012)
-Homebuilder Confidence Index value was 25. Previous was 21.
-4 straight monthly gain, highest since June 2007
-But still way off from 50+ that’s considered to be a healthy market
-Last 50+ reading was April 2006
-Here’s a table showing builder confidence from 1985-PRESENT

Industrial Production/Capacity Utilization (December 2011)
-This is a measure of the strength of the manufacturing sector
-Industrial Production, Month/Month +0.4%
-Manufacturing, Month/Month +0.9%
-Capacity Utilization Rate 78.1%
-The manufacturing sector has been growing for about two years.
-The gain in Industrial Production for December was after a November loss.

Retail Chain Store Reports (week ended 1/14/2012)
-Redbook Year/Year +2.8%. Previous was +3.3%.

-ICSC-Goldman Store Sales, Week/Week +0.1%. Previous was -5.4%
-ICSC-Goldman Store Sales, Year/Year +3.0%. Previous was +2.8%

-Post-Christmas retail sales have been slow.

Empire State Manufacturing Survey
-NOTE: this was released Tuesday 1/17
-Index of business conditions in NY region rose to 13.48 for January, from 9.53 in December
-Zero is the dividing line between expansion and contraction
-This is the third consecutive monthly gain
-Highest level since hitting 11.88 in May 2011 then plummeting to -7.79 in June 2011
-Full report

by Dick Lepre & Julian Hebron

Retail Sales (October)
-Retail Sales, Month/Month: +0.5%
-Retail Sales less autos, Month/Month change +0.3%
-Retail Sales growth slowed from September’s +1.1%. This data supports the Consumer Metrics Absolute Demand Index which showed a sudden decrease in online sales of discretionary durable goods which starting on October 27. In a bizarre coincidence that was the day the 3Q2011 GDP was announced at +2.5%.

Why are consumers spending less? Per-capita real private sector wages has contracted -8.6% below the peak of the 1Q2007. The discontent that the average person has with their income situation is backed by the data.

The point I would like to make here is that unless consumer spending picks up we are headed for slower GDP growth in 4Q2011 and the increased possibility of a recession for the first 2 quarters of 2012.

Worse yet is media obfuscation. The WSJ on-line edition headlines “Retail Sales Advance.”

This is backed up by:

Store Sales
-ICSC-Goldman Store Sales, Week/Week: -0.8%
-ICSC-Goldman Store Sales, Year/Year: 2.4%
-Redbook Store Sales, Year/Year: 4.1% down from +4.6%

Business Inventories (September)
-Inventories – Month/Month change 0.0 %

Empire State Manufacturing Survey
-November manufacturing index activity was +0.61
-Zero is line between growth/contraction
-October was -8.48, fifth straight monthly contraction.
-Today’s +0.61 is first gain since May
-Bloomberg’s report
-Full NY Fed’s report

Housing Market Index
-Housing Market Index value was 18 for September.
-Previous was 14. Consensus was 15.
-Full report from National Association of Home Builders.
-Here’s a quote: “This latest boost in builder confidence is a good sign that some pockets of recovery are starting to emerge across the country as extremely favorable interest rates and prices catch consumers’ attention,” said NAHB Chief Economist David Crowe. “However, it’s worth noting that while some builders have shifted their assessment of market conditions from ‘poor’ to ‘fair,’ relatively few have shifted their assessments from ‘fair’ to ‘good.’ One reason is that builders are facing downward pricing pressures from foreclosed homes at the same time that building materials costs are rising, and this is further squeezing already tight margins.”

Retail
-ICSC-Goldman Store Sales Week/Week: +0.1 %
-ICSC-Goldman Store Sales Year/Year: +3.6 %
-Redbook Year/Year Change +4.6%

Consumer Metrics
The Consumer Metrics indices based on on-line shopping have flattened after their sharp increases in July & Auguest. This may portend increased 3rd Q 2011 GDP growth followed by flat 4thQ GDP growth. First look at 3rdQ 2011 GDP will be Thursday October 27. If it as strong as Consumer Metrics would indicate that would cause equity buying and Treasury selling. This is the same week when we may see significantly increased angst about Eurozone debt. Next week could be a roller coaster.

Business Inflation (PPI)
-PPI – Month/Month +0.0 %
-PPI – Year/Year +6.5 %
-PPI less food & energy – Month/Month +0.1 %
-PPI less food & energy – Year/Year +2.5 %

MBA Mortgage Applications (week ending 9/9)
-Purchase Index – Week/Week +7.0 %
-Refinance Index – Week/Week +6.0 %
-Composite Index – Week/Week +6.3 %

Business Inventories (July)
-Inventories – Month/Month +0.4 %
-Business increased inventories but Retail Sales were flat. Business remains a bit more optimistic than the consumer.

Do the problems over there influence our mortgage rates? Well, to be concise and simplistic, European concerns have not pushed our rates higher, and in fact, in a roundabout way, have helped to push US Treasury debt rates lower, and mortgages along with them. But analysts are quick to point out that the trouble there is likely to spread to other economies, especially if austerity measures are implemented. And great rates are only part of the lending picture – the borrower and the property still have to qualify.

And the problems there certainly, in the long run, overshadow “small” economic news releases here, although measures of our economy certainly move rates in the short run. Yesterday we had some import & export price numbers, along with housing starts and building permits, and then Industrial Production (+.9% in July, the quickest pace in seven months) and Capacity Utilization (which rose to 77.5% from a revised 76.9% in June). But stocks dropped on disappointment in the results of Merkel-Sarkozy talks, and bonds rallied.

In mortgages, traders reported “a big migration” in MBS investors as they sold higher coupon securities and bought lower coupon bonds. Selling from originators totaled around $1.7 billion and consisted of 75% in 4% coupons and 25% in 3.5%’s. (And there are now actually prices on 30-yr 3% coupons, containing 3.25-3.625% 30-yr mortgages!) MBS prices improved by roughly .5 on current-coupon production, resulting in some intra-day price changes from lenders. But it is a big concern for lenders to close the loans that are locked in their pipelines, and following market price changes does not seem to be paramount.

This morning we learned from the MBA that last week’s applications were almost 79% refi’s – not a shock. Overall apps were up about 4%, but while refi’s were up 8% purchase apps dropped over 9%. Much of the slicing and dicing done by mortgage research firms suggest that while supply and prepay risk is increasing, it looks to be “contained”, unless the government comes up with some program to stimulate the housing market which odds are deemed very low of this occurring. We also had slightly hotter PPI numbers, but currently the 10-yr sitting around 2.24% and MBS prices worse by about .125.

MBA Mortgage Applications
-Purchase Index Week/Week: -9.1%
-Refinance Index – Week/Week: 8.0%
-Composite Index – Week/Week: 4.1%
-Refinancing is up because rates are down but the Purchase Index indicates the fact that the housing sector remains quite ill. Blame hard times and tougher qualification standards.

June Retail Sales
-Overall Retail Sales Month/Month: +0.1%
-Retail Sales less autos Month/Month: +0.0%
-This dismal Retail Sales gain is indicative of flat GDP.

Initial Jobless Claims
- 405,000 for week ended July 9, down 22k from previous week
- 4-week Moving Average 423,250, down 3,750 from previous week
-While this number is better that the prior (initially 418,000 and revised to 427,000), there is a psychological barrier at 400,000. No one is going to celebrate for the jobs market until such time as the 4-week average gets under 400,000.

Business Inventories
-Inventories – Month/Month change +1.0 %
-We again have business at +1.0% getting ahead of the consumer at +0.1% in Retail Sales.
-Business spending for inventories will contract to make up the difference.
-Business inventories are the dollar amount (at cost) of inventories held by manufacturers, wholesalers, and retailers.

One final word on yesterday’s Treasury market: the market sold early (higher yields) as Bernanke indicated the possibility of QE3. A very successful reopening of the $21 billion 10-year Treasury auction brought yields down post-Bernanke.

Meanwhile rates are up as mortgage bonds sell sharply (FNMA 4% coupon -62 basis points) on inflation worries in the U.S. and especially China. Rates rise when bond prices drop in a selloff, and bonds sell on inflation threats because inflation reduces buying power of a bond’s future cash flows. Today’s U.S. and China inflation data below.

U.S. May producer prices, a measure of manufacturing inflation, were relatively flat at 0.2 for the month but very high at 7.3% since May 2010. Excluding volatile food and gas prices, PPI was 0.2% for May and 2.1% since May 2010.

May consumer inflation in China rose 5.5% since May 2010, its highest level in three years, and economists don’t see relief soon.

Retail Sales:
Retail Sales (overall) Month/Month was -0.2%
Retail Sales (less autos) Month/Month was +0.3%

Today’s data is market neutral. The weak Retail Sales number reveals that some sectors are doing poorly. Changes in equity and Treasury prices today will be technically driven. Equities were short-term oversold and Treasuries were short-term overbought.

Bonds are topped out at the 200-day moving average so, while a further rally (that would bring lower rates) looks unlikely, a steep price drop (that would cause rates to spike) isn’t justified by economic data. Rates are fantastic, and below is a preview of the rate week ahead.

First, a word on last week’s “low” consumer and producer inflation shown in the accompanying table.

Yearly consumer and producer inflation figures appear tame … if you focus on the “Core” figures which exclude food and energy. This is what the Fed does because they say food and energy prices are too volatile short-term to dictate monetary policy.

But it’s not only monetary policy that dictates consumer mortgage rates. Day-to-day, it’s mortgage bonds that dictate mortgage rates.

If bond markets see inflation trends, they tend to sell, pushing rates higher. This happens because bonds pay investors fixed income each year. If inflation sets in, it erodes the buying power of that future bond income. This causes investors to sell, bond prices to drop, and yields (or rates) to rise.

So while rates are low as bonds rally on bad economic news, bond markets are more sensitive to all-inclusive inflation numbers than the Fed. Those figures are called “All” in the table, and you’ll see they’re much higher (than Core) for consumers and especially producers.

Next week, bond investors will get more producer inflation inputs Monday and Thursday from New York and Philadelphia regional manufacturing surveys. These surveys have shown higher inflation in recent months, and rates will rise slightly if the trend continues.

Bond markets will also digest April housing starts Tuesday and April existing home sales Thursday. These numbers may show a continued weak trend which will help rates.

The jobs picture is slightly weaker which also helps bonds and rates. Thursday’s initial unemployment insurance claims figure will be the latest read.

After three weeks of rising jobless claims, last week’s claims (reported May 12 for the week ending May 7) decreased by 44k, and the four-week moving average of new claims rose 4,500 to 436,750.

Stay tuned, and hope you have a great week.