Inflation expectations moderated thanks to key economic indicators that pointed to easing price pressures. Buying in U.S. Treasury securities turned aggressive, sending prices up and yields, which move in the opposite direction, down. Bond traders fear inflation, as it erodes the value of fixed-rate assets. Traders also believe soft reports could weaken the Fed's need to raise rates beyond its March 28 meeting. Although the decline in yields, which are used to set mortgage rates, has yet to affect them in any major way, rates began to edge down. During a week crowded with important reports, the February consumer price index, or CPI, trumped them all. The CPI, which looks for inflation in retail prices, rose only 0.1 percent, as did the core rate, which excludes volatile food and energy prices. Another major report showed February retail sales plunging 1.3 percent, the steepest decline in six months. Even excluding auto sales, which took a dive, the drop-off in sales was widespread, falling 0.4 percent. Because consumer spending makes up two-thirds of gross domestic product, a decline in sales fosters concerns about economic growth.

A dip in housing starts and building permits provided further evidence of economic cooling. February starts plunged 7.9 percent to an annual rate of 2.12 million units - far below the previous 2.3 million mark; while building permits - an indicator of future activity - fell 3 percent to an annual rate of 2.15 million. In a separate report, first-time jobless claims for the week ended March 11 were up for the third straight week, rising to 309,000 - the highest level since December. The four-week average, which smoothes volatility, rose to 296,500.

Industrial production in February rose by an expected 0.7 percent, while capacity utilization ticked up to 81.2 from 80.9. The University of Michigan preliminary report on consumer sentiment for March held at 86.7, the same as the final February report.

The strongest report of the week showed manufacturing conditions in New York state taking a huge jump. The Federal Reserve Bank of New York's Empire State Manufacturing Survey for March soared to 31.2 from 21 in February - the highest since July 2004. The Philly Fed index on March manufacturing dropped to 12.3, and prices paid declined sharply - good news for inflation-watchers.

Mortgage applications were mixed for the week ended March 10, according to the Mortgage Bankers Association. Purchase applications rose 0.1 percent, while refis fell 1.9 percent. The rate on the 30-year fixed-rate mortgage (based on zero discount points) held at 6.125 percent, while the 15-year fixed-rate mortgage is below 5.75 percent. The rate on the five-year, adjustable-rate mortgage dipped to 5.625 percent.

Upcoming economic news is sparse, but what there is could impact the markets. New and existing home sales and durable goods orders for February will shed light on the housing and manufacturing sectors, while the producer price index will look for inflation at the wholesale level. If reports continue to show moderate-to-slow growth, it is likely that mortgage rates could continue to edge down slightly.

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