Tuesday, March 17, 2009

The trend trajectory of mortgage interest rates will likely be strongly dictated by trading action in the stock markets. Higher stock prices will tend to nudge mortgage interest rates higher -- while lower stock prices will tend to support steady to fractionally lower rates.

There are an increasing number of indicators suggesting the rally in the stock market that began in earnest last Tuesday is vulnerable to a downward correction, probably by the end of the week. From a timing perspective the strongest signature appeared yesterday, March 16th and the second strongest timing signature will occur on Friday, March 20th. Yesterday's late day sell-off in the Dow was an encouraging sign that my projection may indeed be accurate.

From a technical perspective a weak rally into the 7270 to 7370 value level as indexed to the Dow as a reasonable possibility - before a stronger more sustained sell-off in the stock markets develop. If my appraisal of the price action in the Dow proves accurate, look for the prospects of steady to fractionally lower mortgage interest rates to benefit from the flow of capital out of equities and into the relative safe harbor of Treasury obligations and mortgage-backed securities. Without help from a sell-off in the stock markets -- the path of least resistance for mortgage interest rates is to higher levels.

The start of the Federal Open Market Committee's two-day meeting has put trading action in the mortgage market into a holding pattern - at least until the Fed's post-meeting statement is released tomorrow afternoon at 2:15 p.m. ET. Mortgage investors want to hear whether Chairman Bernanke and his fellow central bankers are any closer to becoming direct buyers of Treasury obligations as part of an expanded effort to revive the economy and the financial system.

There is no doubt the Fed could drive mortgage interest rates yet lower if they entered the Treasury market as an aggressive purchaser with an astoundingly large checkbook. The "so what" factor here is simple and straightforward. As in any market place -- rising demand tends to push prices higher. As you well know -- in our world - when prices rise, interest rates fall. While it is certainly possible the Fed might choose this particular course of action it is not very probable.

In the judgment of many other analysts is far too early in the game for the Fed to inject the ailing economy with this particular antidote. The massive expansion of the Fed's balance sheet this strategy would require will likely be reserved for a heroic last ditch effort to rekindle the nation's economic engines - should all other current efforts fail. Look for mortgage investors to remain in their foxholes, with their helmets on and their heads down until they have a chance to dissect the Fed's post-meeting statement tomorrow afternoon.

Investors were certainly quick to shrug off this morning's news from the Commerce Department indicating that housing starts jumped 22.2% higher last month - its biggest single monthly rise since January of 1990. Building permits posted a more modest gain of 3.0% in February - a number that was still well above expectations. The idea that "one-month-does-not-a-trend-make" certainly applies here as much of the housing starts gains were predominately in the multi-family component of the report. Far milder weather in February than in January also likely contributed heavily to the outsize gains in the housing starts figures.

A separate report from the Labor Department revealed producer prices rose by less than expected in February while core prices (a value that excludes the more volatile food and energy components of the overall producer price index number) posted a slightly higher than expected gain. Investors did not hesitate for even a second to declare the February inflation picture at the wholesale level an inconsequential "wash."

Still to come on this week's macro-economic calendar is tomorrow's February Consumer Index. It is expected to show inflation pressures at the consumer remain level benign.