Today marks the end of the second-quarter and the first-half of 2009. It is a time when market participants will be busy making last minute adjustments to their portfolios before the books are closed - and the commission calculations for traders begin. Trading action will likely be a little bizarre today as some market participants execute trades to do nothing other than to spiff up numbers that may otherwise not be that spiffy.
This "window dressing" phenomenon in large part explains why so many analysts were barking at the moon immediately following the reach of the second tier Standard & Poor's/ Case Shiller home price index for April. The index showed home prices in 20 metropolitan areas fell 18.1% on an annualized basis. The annualized index slumped 18.7% in March. The measure declined by 19% in January, marking its largest monthly swoon since records began in 2001. I don't know about you, but it sure looks to me to be very premature to begin dancing in the streets declaring the slump in the residential real estate market has bottomed simply because the pace of decline in home values improved almost imperceptibly for their recent all-time lows. Home values will improve as the employment picture improves. With most economists still projecting the national jobless rate will reach 10% yet this year -- the prospects for a near-term sustained advance in home values will likely remain dim.
Speaking of employment - Thursday's release of the June nonfarm payroll figures remains the dominant event of the week. Investors have already priced in expectations the number of jobs lost in June will match or exceed the consensus estimate of 355,000. The national jobless rate is projected to ratchet up to 9.6% and that view is also reflected in current prices. All will be well in the mortgage market as long as the actual numbers match or show an even worse picture of the labor sector than investors have already cranked in to their pricing models. That is one side of a two sided coin.
The other possibility is that the actual numbers show a labor sector stronger than the majority of market participants anticipated. If that's the case, Thursday's payroll data will immediately light a very short fuse on a very powerful firecracker - resulting in a mad scramble by investors to get out of the way before they get financially singed by the "hot" economic news. Such a condition, should it develop, almost always results in higher mortgage interest rates.
As I mentioned in this space yesterday trading action in the stock markets will be the "wild card" in all of this. I see reasons to believe the Dow (target bottom 8350 to 8250) and NASDAQ (target 1810 or so) are becoming increasingly vulnerable to a multi-day downside price correction. Should such an event occur, capital fleeing falling stock prices will tend to flow to the relative safe haven of Treasury obligations and mortgage-backed securities. This so called "flight-to-quality" is generally supportive of steady to fractionally lower mortgage interest rates. From a timing perspective - I think the chances are good the stock markets will put in a multi-day price high on, or before July 8th.
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