Tame inflation data helped mortgage rates move lower early in the week, but stronger than expected economic data turned them higher later in the week, leaving mortgage rates nearly unchanged from last week. The announcement of larger than expected Treasury auctions next week ($104 billion) also was negative for mortgage rates.

This week’s Consumer Price Index (CPI) and Producer Price index (PPI) data indicated that inflation is not a concern in the short-term. A significant decline in energy prices from one year ago resulted in a very low overall annual inflation rate. Even Core CPI, which excludes food and energy, rose at a tame 1.8% annual rate. However, the benefit from the favorable inflation news was offset by stronger than expected economic growth data. In particular, the Philadelphia Fed manufacturing index showed surprising improvement. In addition, May Housing Starts rose 17% from April, while Building Permits, a leading indicator of future activity, also exce eded expectations. This week’s data sets the stage for next week’s Fed meeting. With inflation currently low but at risk of increasing if the economy continues to improve, the Fed may be reluctant to introduce more stimulus, opting instead to wait and see how the economy performs.

President Obama this week proposed broad new rules for regulating the financial system. One proposal under the Obama plan would create a consumer protection agency which would have the authority to set rules for the mortgage industry. The details may not be known for quite a while, as the plan now faces a lengthy debate in Congress.

With major economic data, Treasury auctions, and a Fed meeting, next week will be a busy one. Existing Home Sales and New Home Sales on Tuesday and Wednesday will provide a look at activity in the housing sector. Also on Wednesday, Durable Orders will be an important indicator of overall economic activity. Personal Income and the Core PCE inflation index w ill come out on Friday. There will be large Treasury auctions on Tuesday, Wednesday, and Thursday. The announcement from the Fed meeting will be released around 2:15 et on Wednesday. Investors are divided about whether the Fed’s next move will be to increase or decrease the level of stimulus. Even if the Fed takes no action next week, the wording of its statement will be likely to have a significant impact on mortgage markets.

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There were also concerns about the US dollar in general and dollar denominated securities as China expressed interest in substituting the yuan to dollar peg in exchange for a new international currency. Fortunately the Fed continued to come to the rescue buying mortgage backed securities in an effort to keep interest rates relatively steady and low. For the week, interest rates on government and conventional loans rose by about 1/8 to 1/4 of a discount point.

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