Friday, August 14, 2009

The mortgage market is experiencing a rally this morning spawned by relief that the record-breaking $75 billion three-part Treasury auction is over and by news from the Labor Department indicating inflation pressures at the consumer level remain near record lows.

The Consumer Price Index, the government's broadest gauge of inflation on Main Street, was unchanged in July, following a 0.7% increase in June. Compared to the same period last year, consumer prices have fallen 2.1%, the largest decline in this measure since January 1950. The core rate of consumer inflation, a value which excludes volatile food and energy prices, edged up 0.1%. Compared to last July, the core inflation rate has risen 1.5%, the slowest advance for this metric since February 2004.

In a separate report the government said industrial production rose 0.5% in July - marking its first monthly increase since December of 2007. Most analysts were quick to discount much of this apparent improvement as a temporary result of the federal "cash-for-clunkers" program. The capacity utilization rate, a guesstimate of how much of the nation's total factory and utility production capabilities are actually being used, rose to 68.5% from June's 68.1%. The June mark for capacity utilization was the lowest since records began in 1967.

This morning's mortgage market friendly news is being shadowed by a growing sense among mortgage investors that until the massive wall of government debt overhanging the credit market is dramatically reduced -- it will be difficult if not impossible for mortgage interest rates to move notably below current levels - no matter what the economic data may say about the state of the economy.

The Fed has been the primary buyer in the mortgage market since the first of the year - purchasing roughly 80% of all new mortgage-backed securities coming to market. For the next couple of months the Fed will likely continue to show a solid buying appetite. As of last week, they have spent about $750 billion of the $1.25 trillion they have allocated for the direct purchase of mortgage-backed securities. In their post-meeting statement following this week's Federal Open Market Committee - Fed. Chairman Bernanke put market participants on notice that once the Fed has spent what money they have to spend - policymakers are unlikely to resurrect this particular program any time soon.

The central bank has slowed their average weekly purchases of mortgage-backed securities from $25 billion to something closer to $12.5 billion to try to get a little more mileage out of the available capital - but eventually other buyers will have to step in and take the Fed's place. I have no doubt that will happen - but the likelihood the replacements will make anywhere near the effort the Fed did to be mortgage market friendly is very small.

Next week will be pretty mild with respect to scheduled economic data. Tuesday's 8:30 a.m. dual release of July Housing Starts and Building Permits figures together with the July Producer Price Index will likely draw little more than a passing glance from mortgage investors. Thursday's 8:30 a.m. ET release of the initial jobless claims figure for the week ended 8/15 and Friday's July Existing Home Sales data won't likely be much of a "barn-burner" either.

Thursday, August 13, 2009

Yesterday, in their post-meeting statement, the nation's central bankers said they saw reasons to believe economic activity is leveling out. Policymakers added, in almost footnote style, their assessment that sluggish income growth and continued job losses would likely constrain household spending.

Sure enough -- this morning's July Retail Sales figure showed a 0.1% drop in overall sales last month after a 0.8% gain in June. Excluding autos and parts sales -- the overall number posted a 0.6% decline in July after a solid 0.5% improvement in June. Granted, a part of the slump in headline retail sales was created by a retreat of 2.1% in gasoline prices during the month - but the key issue here is that the American consumer has not yet joined the recovery party. Until we see signs of significant and sustainable job market expansion -- most mortgage investors believe that it is probably premature to talk about the sustainability of the current economic recovery.

Speaking of job growth, the Labor Department reported this morning that the number of Americans filing for first-time jobless benefits unexpectedly rose by 4,000 last week, while the number of people still drawing unemployment support dropped by 141,000 to the lowest level since April. The best that can be said of current conditions in the labor sector is that the slope of the decline is not as steep as it was at the first of the year.

Today's rather puny economic news has rekindled anxiety about the vigor/sustainability of an economic recovery - which is causing some market participants to question if it is not time to liquidate riskier assets like stocks and plow those proceeds back into relative "safe-haven investments like government debt obligations and mortgage-backed securities. Against this backdrop the Treasury Department will be conducting the last of this week's three-part debt auctions with the gavel scheduled to fall on today's $15 billion of 30-year bonds at 1:00 p.m. ET. If today's offering is more solidly bid than yesterday's 10-year notes (a reasonable expectation) -- look for the current level of mortgage interest rates to remain unscathed to perhaps fractionally lower before the closing bell sounds. A crummy reception for today's 30-year bonds will almost certainly take a toll on the mortgage market in the form of higher interest rates.

Wednesday, August 12, 2009

Trading activity in the mortgage market is exceptionally thin as most investors have elected to take a "wait-and-see" approach with respect to the day's events.

The Treasury Department is conducting a $23 billion 10-year note auction. Yesterday's $37 billion 3-year note auction drew exceptionally solid bids from both domestic and foreign investors -- but that result is certainly no guarantee today's 10-year note offering will be as aggressively bid. Analysts cite persistent concerns that $2 trillion of government debt issuance this year will ultimately ignite inflation; a prospect that combined with signs of a budding economic recovery may require the government to "sweeten the pot" with higher yields on today's 10-year note offering in order to generate the required capital. If so, lousy auction results this afternoon at 1:00 p.m. ET will tend to nudge mortgage interest rates higher.

The Federal Open Market Committee will wrap up a two-day meeting this afternoon at 2:15 p.m. ET with the release of their post-meeting statement. The Fed is broadly expected to leave benchmark interest rates near zero. Policymakers will likely go out of their way to damp down growing anticipation that they are considering raising short-term interest rates in the near future to preemptively head off any inflation threat that might appear as the economy staggers to its feet from the worst recession since the Great Depression. It is highly unlikely the committee will substantially alter the outlook Fed Chairman Bernanke spelled out in July that calls for the economy to stabilize but grow sluggishly in the second half of the year, with persistently high unemployment well into 2010.

From a mortgage investor's perspective the most important part of today's Fed statement will be anything that indicates the central bank will soon end their direct purchase programs for government debt and mortgage-backed securities. There is a good chance policymakers will take this opportunity to lay the groundwork for concluding their direct purchases of $300 billion of various government debt instruments, $1.25 trillion of mortgage-backed securities and $200 billion or so of Fannie Mae and Freddie Mac agency debt. If this assessment proves accurate, the approaching retreat of a "big-checkbook" buyer from the credit markets may cause mortgage investors to shove rates fractionally higher. The Fed's post-meeting statement is expected to be released this afternoon at 2:15 p.m. ET -

Tuesday, August 11, 2009

The trading day got off to a mortgage market friendly start when the Labor Department announced that productivity rose at its fastest pace in six years during the second-quarter.

Productivity, a measure of how much an employee produces for each hour worked, rose 6.8% during the previous three-months, much stronger-than expected and well ahead of the 0.3% gain during the first three-months of the year. The surge in worker productivity drove unit labor costs, a gauge of inflation and profit pressures closely watched by the Fed, 5.8% lower to its lowest level since the second-quarter of 2000. Solid gains in productivity with wage pressures solidly in check will keep a lid on overall inflation - and that is certainly a condition that tends to be supportive of steady to perhaps fractionally lower mortgage interest rates.

Unfortunately for those looking for a strong rally in the mortgage market today-- the economic news is only one-part of a three-part story.

The initial improvement in mortgage interest rates spawned by friendly news from the labor sector is being curbed by lingering concerns over the reception Uncle Sam's record setting three-part $75 billion auction will receive this week. The Treasury Department will kick things off with a $37 billion auction of three-year notes this afternoon. This offering is the biggest for this particular security ever. The yield on this security has climbed notably higher since the last auction in July - which should serve to increase the general attractiveness of this offering to domestic and foreign investors alike. If so, this event will likely produce little visible effect on the current level of mortgage interest rates. A poorly bid auction today will ramp up investor anxiety regarding the outcome of tomorrow's $23 billion 10-year note offering and Thursday's $15 billion 30-year bond sale. As you well know, nervous mortgage investors tend to push mortgage rates higher - not lower. I'll post the results of today's 3-year note auction as soon as possible following the conclusion of bidding at 1:00 p.m. ET.

Last but not lest -- the members of the Federal Open Market Committee have gathered in Washington for a regularly scheduled two-day meeting. There is a lot of chatter in the marketplace about the likely outcome of policymakers' deliberations. Central bankers are broadly expected to leave their benchmark short-term interest rate (fed funds) at 0.0% to 0.25% -- the range that it has been in for months. In their post-meeting statement the Fed will likely give a nod to signs the recession is beginning to wane -- but Mr. Bernanke and his fellow committee members will likely unanimously warn that the recovery will probably be painfully slow. All of those assumptions are already priced into the mortgage market.

The pivot point of tomorrow's post-meeting statement from the Fed as far as mortgage investors are concerned is what, if anything, policymakers have to say about their plans to unwind their unprecedented intervention in the financial markets. If as expected, the Fed indicates they will not extend their direct purchases of Treasury obligations and mortgage-backed securities beyond the planned expiration at the end of September - the approaching retreat of a "big-checkbook" buyer from the credit markets may cause mortgage investors to shove rates fractionally higher. The Fed's post-meeting statement is expected to be released tomorrow afternoon at 2:15 p.m. ET.

Friday, August 7, 2009

The good news from an economic and stock market perspective is that the July headline nonfarm payroll loss was considerably less than expected - which, on the other hand, was definitely bad news as far as the near-term prospects for lower mortgage interest rates is concerned.

The Labor Department reported employers cut 247,000 jobs in July, far less than the 320,000 most economists had projected. The job loss in July represents the slowest pace of job destruction since August of 2008. Last month's fob losses were spread across most sectors of the economy, but the pace of firings appears to have slowed substantially. With fewer workers being laid off, the national unemployment rate eased to 9.4% in July from 9.5% in June - marking the first time the jobless rate has fallen since April of last year. To round out the much improved story from the labor sector - the government revised May and June figures to show 43,000 fewer jobs were lost during those months than had been previously reported.

Those readers that were watching as the July nonfarm payroll data hit the news wire saw mortgage interest rates immediately jump dramatically higher - before improving notably from their worst levels of the day. Following the early "out-of-the-gate" knee-jerk investor reaction -- calmer, cooler traders were quick to pick-up on the fact that the workforce fell by 422,000 workers in July, far exceeding June's decline of 155,000 - an indication that large numbers of unemployed workers have become so disillusioned with current labor market conditions they have simply quit looking for work. My personal opinion is that the full story here is yet to be told.

Boiling all this economic double talk down to its "bare essence", here is the core "so what" factor from today's labor market report. While it is true that employers cut fewer jobs in July than at any other time since last summer, unemployment remains stubbornly high, which means consumers will likely remain very conservative with their spending. Since consumers drive more than 80% of all domestic economic activity the pace of future economic growth will remain extremely anemic - a condition that will significantly limit the velocity of increase for mortgage interest rates over the foreseeable future.

Looking ahead to next week, the members of the Federal Open Market Committee huddle up in a two-day meeting on Tuesday and Wednesday, Uncle Sam will be thrashing around in the credit markets over the middle three-days of the week looking to borrow $75 billion in the form of three- and 10-year notes and a smattering of 30-year bonds. In terms of economic reports Thursday's July Retail Sales numbers and Friday's Consumer Price Index will draw considerable mortgage investor attention.

Wednesday, August 5, 2009

The plot thickens.

Data contained in this morning's July Institute of Supply Management Service Sector index together with private reports from ADP Employer Services and global outplacement consultancy Challenger, Gray & Christmas collectively showed employers cut -- or planned to cut -- more jobs in July than analysts had been expecting.


The employment component of the July Institute of Supply Management Service Sector index, a statistical measure of performance in a segment of our economy that represents better than 80% of all activity, fell to 41.5% from the prior month's level of 43.4%. Many see the slippage in the employment component of the broader ISM service sector index as an indication that recent hints of improvement in the labor sector may have been nothing more than a false dawn.


According to the ADP data, employers cut 371,000 private sector jobs last month - well above economists' projections for a tally of 345,000 job losses to be reported by the private payroll processing firm. Separately, the numbers from outplacement company Challenger showed U.S. businesses increased the number of planned layoffs in July to 97,373 - the first increase in this metric in six months and a 31% increase from the 15-month low set in June.


These three reports have left mortgage investors wondering if Friday's more comprehensive nonfarm payrolls report, which also includes a head-count of government sector jobs, may show employers shed more than the 320,000 jobs currently priced into the mortgage market.
In the weird world of bonds and mortgage-backed securities -- a weaker than expected July nonfarm payroll report will tend to support steady to perhaps fractionally lower mortgage interest rates. You can bet there will be some floor-pacing and head-scratching going on among investors over the balance of the day and into tomorrow's close. A big "miss" on the payroll data either way will undoubtedly ratchet up market volatility - as those on the losing side of the actual July payroll data scramble to limit how much they have to pay the winners who were on the "right" side of the labor sector numbers.

Monday, August 3, 2009

Amazing - the economy appears to be picking up steam even without its strongest engine - consumer spending.

While the shape of the recovery is still in doubt, signs of economic growth are appearing more frequently. One big factor working in the economy's favor is that businesses cut inventories to the bone as the worst recession since the Great Depression dragged on -- and now those inventories need to be replenished.

The Institute of Supply Management said this morning that its index of national factory activity increased a larger than expected 4.1 points to 48.9 in July from 44.8 in June. The index is 16 points above it cycle low and it highest since August 2008. The component details of the report were very encouraging - most notably the employment component - which increased roughly 5 points in a month to 45.6 - its highest mark since last August. The sharp improvement in the employment picture in the manufacturing sector was a bit of a surprise for many mortgage investors - who instantly reacted to the data by nudging interest rates higher. Most investors are keenly aware that an economic recovery based solely on a bounce in inventories won't have much staying power - but a recovery driven by steady employment growth will almost certainly prevail for an extended period of time. The jury is still out on which of these two underlying dynamics is truly at work now.

Following the "hot" ISM numbers earlier this morning mortgage investors used their erasers to make adjustments to their earlier projections for Friday's July nonfarm payroll figures. Most market participants have now penciled in expectations for a loss of 320,000 jobs last month (revised from earlier forecasts calling for a loss of 340,000) and a national jobless rate in the neighborhood of 9.6%. If the actual numbers match or very closely approximate these projections -- Friday's report will likely have little, if any noticeable impact on mortgage interest rates. A headline number that exceeds 320,000 (say 345,000 or more) and or a national jobless rate of 9.7% or higher will tend to be supportive of fractionally lower interest rates. The big risk is that the government's actual numbers fall below the current consensus estimates -- say a headline job loss lower than 320,000 and/or a national jobless rate of 9.5% or less. If those conditions were to prevail - mortgage rates will almost certainly spiral higher.

Given the upside "surprise" with respect to the labor picture embedded in this morning's Institute of Supply Management report - look for mortgage investors to adopt a "better-safe-than-sorry" pricing strategy up and through the release of Friday's much anticipated, and far more important July nonfarm payroll figures.

Now is the time to invest in real estate. www.innerbanksliving.com