This past week was very volatile for Treasuries. The mostly positive economic reports caused bond traders to worry about an early rate hike that spurred selling in bonds.  Because of the activity the yield, which moves in the opposite direction of price, on the 10 year treasury hit 3.59%, its highest since mid-August.

The Producer Price Index for November kept the positive economic news going, but increased the fear in traders. It rose by a stronger-than-expected 1.8%. Energy prices accounted for three-quarters of the increase, opening the door for future inflation. And the core, which eliminates food and energy prices, rose 0.5% due to the higher cost of trucks and cigarettes.

Industrial production beat expectations, rising 0.8% – the biggest increase since August. It remains down 5.1% over the past year. But the Empire State index of December manufacturing conditions plunged to 2.55 from 23.51 when 22 was expected.

On Wednesday the consumer price index, which measures retail inflation, calmed inflation anxiety. It rose 0.4% in November and the core was unchanged from October. But once again there were signs that the housing market is recovering. Building permits in November rose to an annual rate of 584,000 from 551,000, while housing starts jumped by 47,000 to an annual rate of 574,000 units.

That afternoon the Federal Reserve once again said that interest rates will be “exceptionally low” for an “extended period of time.” It did note, however, that although economic conditions will remain weak, they are stabilizing, with housing and consumer spending on the rise. It noted that the labor market and businesses continue to struggle. In the end, there was little reaction from the financial markets.

Not so on Thursday. First-time unemployment claims for the week ended Dec.12 rose by 7,000 to 480,000, while the more-accurate four-week average fell for the 15thstraight week. Continued claims, those collecting benefits for more than one week, also rose to 5.186 million.

Two strong reports followed: leading economic indicators, or LEI, and the Philly Fed index of December manufacturing conditions. LEI rose 0.9%, and for the first time since December 2007 employment did not negatively impact the index. The Philly Fed jumped to 20.4, its highest level since April 2005. These reports spurred selling in bonds.

But the rise in initial claims, another credit downgrade for Greece and the Fed’s cautious outlook for economic recovering prompted a big sell-off on Wall Street and the flight to quality was on. The 10-year yield fell below 3.50% for the first time in a week.

The Mortgage Bankers Association reported that applications to refinance rose 0.9% for the week ended Dec. 12, and accounted for 75.2% of all mortgages — the highest percentage since April 24. Purchase apps edged down 0.1%.

This week features another three-day release calendar, but we should just have small movements. And trading should be light with the Christmas holiday.  Any signification deviations from predictions will move the market more than normal because of fewer traders working less transactions.

Tuesday’s first report is the final revision of 3rd quarter GDP. This shouldn’t have any impact on mortgage rates unless it varies greatly from analysts expectation of 2.7% — down slightly from last months first revision of 2.8%. GDP prices are expected to show a 0.5% increase, which would be unchanged.

Existing home sales for November are expected to support the theory of a housing market rebound. Sales are predicted  to rise to an annual rate of 6.30 million units, up from 6.10 million.  This release is to come from the National Association of Realtors.  I don’t expect for this report to have much of any impact on mortgage rates, unless the report varies tremendously from the prediction.  Weaker numbers would be positive news for the bond market and mortgage rates because it would mean a weaker housing market.

Wednesday’s report on new home sales for November should follow suit. Sales are expected to rise by 10,000 units to an annual rate of 440,000.  This report comes from the Commerce Department.  I don’t expect this report to move the market much at all, unless the number varies greatly from expectations.

Personal income for November is predicted to rise 0.5% from the previous 0.2% increase. However, personal spending could rise 0.7%, the same as in October.  This gives us an important look at the US consumer’s ability to spend and current spending habits.  Since the spending of consumers makes up two-thirds of the U.S. economy any data coming from spending/income will have an impact on mortgage rates.

Separately, the University of Michigan’s final consumer sentiment survey for December is expected to climb to 73.9 from 73.4. Two weeks ago the index shocked traders when it rose 6 points, sending Treasury prices tumbling.  This is very important to review because rising consumer confidence means consumers may be more apt to make large purchases in the very near future.  A revision larger than thought will lead to higher mortgage rates.

Thursday’s initial claims report for the week ended Dec. 19 could sway Treasuries if it shows another big increase in initial claims. Or not.

The final report, durable goods orders for November, is predicted to improve from October.  The forecast expects the orders to rise 0.5% versus a 0.6% decline, while orders, excluding transportation, should increase 1.0% — far better than the previous1.3% decline.  A decline in orders would be good for the bond market and possibly send mortgage rates lower; however, a number larger than expected could lead to higher mortgage rates.