Thursday, June 25, 2009

The mortgage market got off to a nice little rallying start this morning following the Labor Department's announcement that the number of Americans filing first-time claims rose by an unexpected 15,000 during the week ended June 20^th. The four-week moving average of jobless claims, a value that smoothes out the volatility in the raw weekly numbers, rose a mere 500.

The true underlying health of the labor sector is a huge question in mortgage investors' minds. If the labor sector is really weaker than most now believe - the economy will sag further. In the convoluted world of credit markets a deteriorating labor sector tends to be supportive of steady to perhaps fractionally lower mortgage interest rates. On the other hand, if the labor sector is stronger than anticipated - with bankruptcies at General Motors and Chrysler Group together with normal model year retooling furloughs and standard end-of-the-year layoffs in the nation's schools creating a noticeable but temporary upward skew in the statistics -- the return to a steady-to-lower trending pattern of data in the labor sector would almost certainly put upward pressure on mortgage interest rates. Unsure which of these two scenarios will prove to be the most accurate - but I do know for a fact investors will be keenly attuned to this economic metric over the course of next three- to four-weeks for hints indicating a shift in the labor market trend.

In a separate report the government announced first-quarter Gross Domestic Product, a statistical measure of the value of all the goods and services produced within the country's borders, dropped at a 5.5% annual rate, after shrinking 6.3% in the fourth-quarter of last year and 0.5% in the third-quarter. The Commerce Department's original estimate of Gross Domestic Product was -6.1%, revised to -5.7% and then to the current -5.5% which will not be revised again. For reasons of their own, credit markets shrugged off the substantial quarter-over-quarter improvement embedded into today's measure of domestic economic activity. It is highly unlikely mortgage investors will continue to be so nonchalant should the second-quarter Gross Domestic Product figure show additional improvement. It will be another thirty-days or so before this particular issue rolls around again into such sharp focus -- the government will make public their initial estimate of second-quarter Gross Domestic Product performance on July 30^th.

Most observers believe today's 7-year note offering will be well bid by domestic and foreign investors alike. If so, this event will likely have little, if any noticeable impact on the trend trajectory of mortgage interest rates today. A poorly bid 7-year note auction, a condition that would require the government to offer yet higher yields to attract the required capital, will almost certainly cause disappointed mortgage investors to nudge rates fractionally higher.