Monday, December 21, 2009

With nothing in the way of new macro-economic data to guide them the few mortgage investors still at their desks appear to be taking their directional cues for mortgage interest rates from trading action in the stock market. In today's early going a solid rally in the stock market is exerting noticeable upward pressure on mortgage interest rats.

Evidently an increasing number of mortgage investors have begun factoring in the likelihood the economy is beginning to pick itself up off of the mat after being brought to its knees by the most severe recession since the Great Depression. Against this backdrop tomorrow's GDP report will likely invoke little, if any reaction from traders. The Existing and New Home Sales figures due on Tuesday and Wednesday respectively are also unlikely to trigger a Grinch like response from market participants.

The November personal income and spending report will be the "biggie of the week" with respect to economic news. Should Wednesday's core personal consumption expenditure index (a component of the November personal income and spending report) post a benevolent reading of +0.1% (as expected) - look for mortgage investors to do nothing more than make one more raid on the holiday goodies in the break-room -- before grabbing their coats and heading home to celebrate Christmas. The few traders that stay around until the final bell sounds at 2:00 p.m. ET will likely cover their few remaining open positions before the holiday break - which may just bring in enough buy orders to nudge mortgage prices a little higher. In my opinion, the chances remain pretty strong that last Friday's profit-taking sell-off in the mortgage market will continue for the first day or two of the week -- before showing a little potential rally on Wednesday and perhaps the half-day session of Thursday.

Friday, December 18, 2009

With nothing in the way of new macro-economic data to guide them, mortgage investors much decide whether to lock in some profits before the trading day comes to an end - or stick with the rally in hopes that it produces more upside gains before the early close for the Christmas Holiday next Thursday.

Look for trading action to become increasingly spasmodic as traders focus on making sure profits are safely registered "on-the-books" and as they put the final touches on their year-end positions. The likelihood that anyone will be aggressively adding large risk positions to their portfolio is small - limiting the potential for a notable move to yet lower mortgage interest rates before the New Year begins.

The few mortgage investors still at their desks next Tuesday will get a look at the final estimate of economic growth for the third-quarter. The majority of economists expect Q3 Gross Domestic Product will register a reading of 2.8% -- exactly matching the previous guesstimate. Tuesday also brings expectations for an improved pace of November existing home sales. The day starts off on Wednesday with the November Personal Income and Spending report. Contained within this data series is the Personal Consumption Expenditure Index, one of the Fed's favorite measure of inflation pressure at the consumer level. While both income and spending are expected to have edged a bit higher last month -- the pace of consumer inflation is expected to have posted a very modest, and mortgage market neutral gain of 0.1%. Wednesday's 10:00 a.m. release of the November New Home Sales and Thursday's initial weekly jobless claims and November durable goods orders numbers will likely draw as much investor attention/interest as a single snowflake in a blizzard. The mortgage market will close early at 2:00 p.m. ET on Thursday and will remain closed on Friday for the celebration of Christmas.

Thursday, December 17, 2009

The number of workers filing new applications for jobless benefits unexpectedly climbed by 7,000 during the week ended December 12th. It was the second straight week initial claims have posted a gain. Most mortgage investors were quick to dismiss this mornings' jump in the jobless claims data since the figures are notoriously volatile during the holiday season because of difficult seasonal adjustments.

Wednesday, December 16, 2009

The Federal Reserve is expected to stick to its mortgage market friendly monetary policy strategy when it wraps up its two-day meeting this afternoon at 2:15 p.m. ET.


Most analysts believe policymakers will be very hesitant to pull the plug on low interest rates too quickly due to persistent weakness in the labor sector, tight lending conditions at both the business and consumer levels, and a non-threatening inflation environment.


This morning's earlier news from the Labor Department indicating consumer prices rose a modest 0.4% in November while the more important core rate (a value that excludes the more volatile food and energy components) remained unchanged from month earlier levels - made the Fed's interest rate decision just a little bit easier. This morning's benign inflation reading at the consumer level went a long way toward tamping down budding inflation fears spurred by yesterday's stronger-than-expected uptick in November Producer Price index data series. For those still wringing their hands about inflation threats it is worth noting that the Fed's long-term forecast for their preferred measure of inflation, the Commerce Department index tied to consumer spending and excluding food and fuel, calls for gains in a range of 1.8% to 2.0%. That gauge, which is typically lower than the Consumer Price Index, was a mere 1.4% in the 12 months to October.


The "so what" factor here is significant. Amid tame inflation and elevated unemployment, the probabilities are extremely high the members of the Federal Open Market Committee will reaffirm their commitment to extremely low interest rates for an extended period. The committee will likely note the recent improvement in household spending and industrial production, but it will not likely use November's unexpected improvement in nonfarm payrolls to revise its overall economic and inflation outlook for its monetary stance. If this assessment proves accurate, the traditional post-meeting statement from the Fed (expected at 2:15 p.m. ET) will likely be mortgage interest rate neutral.


Any hint that the central bank is considering backing off of its asset purchase programs, or perhaps mulling an increase in its benchmark short-term interest rates will likely send mortgage interest rates notably higher. While it is worth noting this risk exists - the probability of such an outcome is exceptionally low.


In other news of the day, the Mortgage Bankers of America said mortgage applications nudged 0.3% higher during the week ended December 11th. Purchase applications fell 0.1% while refinance requests climbed 0.9%. The refinance share of mortgage activity increased to 75.2% of total applications from 74.4% last week. The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.9% up 0.4% from the previous week. The rate remained above the all-time low of 4.61% set in the week ended March 27 - but well below well below the year-ago level of 5.18%.

The mortgage market took-one-on-the-chin this morning when the Labor Department reported prices paid at the farm and factory gate jumped more than double the 0.8% gain most analysts had been expecting.


The headline November producer price index was up a surprising 1.8% while the core index (a value stripped of the more volatile food and energy components) posted a larger-than-expected 0.5% gain. The lion's share of the surge in the November producer price index figures was created by a strong uptick in energy costs and new model year price increase for light trucks. Crude oil prices hit $82 a barrel during the survey period for this data but has since retreated sharply - trading around $70 a barrel. Near record excess manufacturing capacity and a jobless rate that is projected to average 10% for much of 2010 will likely prevent suppliers from passing on these increasing costs through at least the end of the first-quarter of the New Year.



Mortgage investors are taking a cautious "wait-and-see" approach in front of the last Federal Open Market Committee meeting of 2009. The text and tone of the Committee's post-meeting statement (scheduled for release at 2:15 p.m. ET, Wednesday, December 16th) will contribute significantly to the trend trajectory of mortgage interest rates up and through the Christmas break.



Any hint that the central bank is considering backing off of its asset purchase programs, or perhaps mulling an increase in its benchmark short-term interest rates will likely send mortgage interest rates notably higher. While it is worth noting this risk exists - the probability of such an outcome is exceptionally low.



Even considering today's outsized gains in the November producer price index numbers -- the underlying pace of inflation remains by all measures comfortably within the Fed's stated "comfort zone." From a historical perspective it is worth noting there has never been a time that the Fed has begun to tighten short-term interest rates as unemployment rates were rising and inflation pressures remained benign.


As things now stand, the central bank will probably guardedly acknowledge the recent improvement in the nation's economic backdrop -- but will clearly renew its commitment to keep its benchmark short-term interest rates near zero for an "extended period." If this assessment proves accurate, look for this event to have little, if any significant influence on the trend trajectory of mortgage interest rates.

Monday, December 14, 2009

Boring.

Trading activity has almost ground to a standstill in the mortgage market as investors choose to take a cautious "wait-and-see" approach in front of the last Federal Open Market Committee meeting of 2009. The text and tone of the Committee's post-meeting statement (scheduled for release at 2:15 p.m. ET, Wednesday, December 16^th) will contribute significantly to the trend trajectory of mortgage interest rates up and through the Christmas break.

Any hint that the central bank is considering backing off of its asset purchase programs, or perhaps mulling an increase in its benchmark short-term interest rates will likely send mortgage interest rates notably higher. While it is worth noting this risk exists - the probability of such an outcome is exceptionally low.

The underlying pace of inflation remains by all measures comfortably within the Fed's stated "comfort zone." From a historical perspective there has never been a time that the Fed has begun to tighten short-term interest rates when unemployment rates were rising and inflation pressures remained benign. As things now stand, the central bank will probably guardedly acknowledge the recent improvement in the nation's economic backdrop -- but will clearly renew its commitment to keep its benchmark short-term interest rates near zero for an "extended period." If this assessment proves accurate, look for this event to have little, if any significant influence on the trend trajectory of mortgage interest rates.

Friday, December 11, 2009

It appears many mortgage investors are fretting far more strenuously over the disappointing auctions of 10-year and 30-year debt obligations than they are over a stronger-than-expected reading for November Retail Sales.

There are some analysts aggressively trying to fan worries that the last two Treasury auctions of the week drew less than stellar demand because -- U.S. government debt obligations - seen as the world's safest securities - are in danger of losing their coveted AAA rating. While such an event is certainly possible - it is not very probable and there is a major difference between those two conditions. It is much more likely that weaker-than-expected demand for Wednesday's $21 billion of 10-year notes and Thursday's $13 billion of 30-year bonds is more a function of year-end investor preference for either cash or very short-term government debt obligations. It is far more likely we are dealing with a seasonal condition with respect to demand for these longer-dated securities - rather than the effects of a major shift in investor sentiment.

Selling pressure in the mortgage market surged this morning driven by a report from the Commerce Department indicating November Retail Sales increased 1.3%, its largest advance since August, after rising 1.1% in October. It was the second straight monthly gain for overall retail sales and handily beat market expectations for a 0.7% gain. Compared to last year, overall retail sales were up 1.9%, the first year-on-year gain since August 2008. Excluding autos, retails sales increased 1.2% last month, the largest increase since January.

As the day progresses look for calmer, cooler heads to conclude that a significant amount of the surge in the pace of November sales was created through heavy discounting by retailers attempting to get a head-start on the holiday season. There is still a big question mark attached to the retail sales data regarding the sustainability of November's solid performance. Fundamentally, conditions remain poor for consumers. Wage income is more than 3.0% below its year-ago level and there is little chance of improvement in that figure until the labor sector once again begins to produce more jobs than it looses on a month-over-month basis. In a nutshell - in the judgment of many of the so called "experts", it is unlikely this report is as threatening to the prospects of steady to perhaps fractionally lower mortgage interest rates as many "talking-heads" are currently trying to make it out to be.

Stay Tuned...

Tuesday, December 8, 2009

Global stock markets fell hard earlier today as pessimistic news reports trumpeting details of a resurgent credit crisis in Dubai and a major downgrade in the sovereign debt of Greece sent foreign stock investors scrambling to park capital in the relative safe haven of U.S. debt obligations and mortgage-backed securities. This "flight-to-quality" buying spree in the government debt and mortgage market is a welcome but likely temporary development.

Uncle Sam will be in the credit markets today looking to sell a stack of 3-year notes worth $40 billion. The auction will conclude at 1:00 p.m. ET and is expected to be well bid - hopefully setting the stage for an equally well bid $21 billion 10-year note sale tomorrow and a $13 billion 30-year bond offering on Thursday. Look for today's auction to exert little, if any meaningful influence on the trend trajectory of mortgage interest rates.

Monday, December 7, 2009

With nothing on the economic calendar to stir trading activity - mortgage investors are generally marking time ahead of the three-part, $71 billion Treasury debt auction scheduled for Tuesday through Thursday. Believe-it-or-not last week's heavy sell-off in the government debt market has probably limited the upward pressure this event might have otherwise exerted on mortgage interest rates over the course of the next five business days.

Mortgage investors will be intently watching the Treasury auction results for any sign that a change in market psychology occurred in conjunction with last Friday's dramatically improved labor market story - or for an indication skepticism about the sustainability of the budding economic recovery remains high among credit market participants.

Given strong seasonal demand and the sharp price markdowns of last week, I think there is a reasonable chance overall demand for this week's government debt offerings will be decent. Should my assessment prove accurate, the Treasury auctions will tend to be supportive of at least steady mortgage interest rates - with an outside chance rates will find the traction necessary to move to fractionally lower levels.

The economic release of most interest to mortgage investors - the November Retail Sales report - does not arrive until Friday.

Friday, December 4 2009

It is almost too good to be true.



Employers cut far fewer jobs than expected last month in the best showing for the labor market since the recession began in December 2007. According to government figures, the economy shed only 11,000 jobs last month - far fewer than the 130,000 drop in the November headline nonfarm payroll figure most economists had anticipated. The national jobless rate dropped to 10% from October's 10.2%.


The data geeks that compile these figures also announced that they had overstated the job losses in September and October by 159,000. Not only did payroll losses drop sharply, but leading indicators of employment also improved significantly. In particular, temporary help agencies added 52,000 jobs last month following a gain of 40,000 in October. Businesses tend to ramp up their temp numbers before adding permanent headcount to their payrolls.



On its face the story from the labor sector is that the worst of the recession appears to be behind us. The recent flow of macro-economic data continues to paint a developing picture of the economy in transition from a deep recession to a modest recovery. That's terrific news for the millions of American's who yearn to return to the labor force -- and overall I think it is good news for single-family mortgage originations.


Even though improving statistics from the labor sector will likely encourage the Fed to be more vocal about an exit strategy from their sharply mortgage market friendly monetary policy strategies - the inevitable rise in mortgage interest rates will probably be largely muted by a return of consumer confidence which subsequently will likely lead to improved demand for homeownership.


Which is worst - an economy in which a loaf of bread costs $1.00 and a man/woman happens to have a $1.00 to spend on bread - or an economy is which a loaf of bread cost 25 cents and a man/woman has no money at all to spend on bread or anything else?



Looking ahead to next week Uncle Sam returns to the credit market looking to borrow $70 billion or so in the form of 3-year notes on Tuesday, 10-year notes on Wednesday and concluding with a 30-year bond offering on Thursday. The only major economic report on tap is Friday's 8:30 a.m. ET release of the November Retail Sales figures.

Thursday, December 3, 2009

Following a stronger-than-expected weekly jobless claims number - mortgage investors were quick to push mortgage interest rates fractionally higher in the day's early going.


According to the Labor Department, new applications for jobless benefits unexpectedly fell by 5,000 last week to the lowest level in more than 14 months. While this jobless claims report falls outside of the survey period for tomorrow's 8:30 a.m. ET release of the far more important November nonfarm payroll figures -- some investors wasted no time placing their "bets" for a surprisingly mortgage market unfriendly employment story.


I personally think these mortgage investors may have jumped the gun a bit. Even though the first-time claims number was better than the majority of economist had anticipated - the number of people continuing to collect benefits after the initial week rose by 28,000. Going one step further, with hiring so slow, the unemployed are exhausting their regular benefits (26 weeks in most states) and instead are claiming extended benefits or Emergency Unemployment Compensation. Growing totals for these programs have more than offset the decline in the regular weekly jobless claims number. For the week ending November 14th, the enrollment in the extended benefits programs offered by the government grew by 323,000. From this perspective, the weekly jobless claims numbers are almost certainly glossing over the underlying anemic conditions in the labor market.



The probabilities remain high that Friday's November nonfarm payroll will fall within shouting distance of the consensus estimate for a national job loss number of 130,000. If so, the Labor Department's data will likely exert little, if any influence on the mortgage market. On the other hand, if the headline number shows the economy lost 150,000 jobs or more and/or the national jobless rate exceeds 10.3% -- the odds are high that a large number of investors will be caught leaning the wrong way - resulting in higher prices and lower mortgage interest rates before the day is over.

Wednesday, December 2, 2009

The swoon in the mortgage market yesterday afternoon was primarily the result of capital flowing out of the relative safety of U.S. government debt obligations and mortgage-backed securities back into higher risk asset classes as market participants became increasingly convinced the Dubai story would not morph into a another major global financial crisis. Easy come - easy go.


Trading action so far today is being driven by a relatively few players moving light volume. There is nothing much going on to inspire more dynamic action between buyers and sellers.



According to a report released earlier this morning by ADP Employer Services, U.S. private employers cut 169,000 jobs from their payrolls in November which was fewer than the 195,000 jobs lost in October but more than the 155,000 jobs loss that most analysts had been anticipating the data would indicate. It was the eighth straight month of fewer job losses reported by ADP. It may not be exactly what market participants were looking for, but at least the trend is right. The ADP report has been weaker than the government's much more important Nonfarm Payroll figurers in nine of the past 11 months, with an average miss of -55,000. The probabilities remain high that Friday's November nonfarm payroll will fall within shouting distance of the consensus estimate for a national job loss number of 130,000. If so, the Labor Department's data will likely exert little if any influence on the mortgage market.



In their standard Wednesday report, for the week ended November 27th the Mortgage Bankers of America said their mortgage application index (a value that includes request for both purchase and refinance loans) was up 2.1% over the previous week. The purchase index was up 4.1% while the refinance index gained 1.7% from the week before. Refinance applications accounted for 72.1% of all applications. It was the first time in eight weeks that both the purchase and refinance indices increase from the previous week.



To sustain the current level of mortgage interest rates will likely require softer-than-expected November employment numbers on Friday and/or a major sell-off in the stock markets. While both outcomes are certainly possible - they are each in their own right not very probable.
In my judgment, Friday's headline nonfarm payroll report will need to show the economy lost more than 150,000 jobs and/or the national jobless rate exceeded 10.3% last month in order to induce mortgage investors to push mortgage interest rates notably lower. In terms of stock market trading activity it will likely take a convincing move below the 10,200 mark for the Dow Jones Industrial Average before a sustained flow of capital out of the stock market could be counted on to support the prospects for notably lower mortgage interest rates.

Tuesday, December 1, 2009

The Dubai saga that agitated financial markets last week is coming to an end. The rest of the world is starting to minimize the Dubai World story now. Dubai is in talks with its lenders to restructure $26 billion of debt, easing concerns that a default would add to the $1.7 trillion financial companies around the world have written down as the credit crisis impaired the value of their assets. The general sense among credit market participants is that fallout from the Dubai situation will be both short-lived and very limited. The resulting flow of capital that poured into the relatively safety of U.S. government debt obligations and mortgage-backed securities late last week as the Dubai story hit the newswires is now flowing back out into riskier asset classes like stocks -- creating some slight upward pressure on mortgage interest rates in today's early going.



The Institute for Supply Management (a not-for-profit United States association established for the benefit of the purchasing and supply management profession, particularly in the areas of education and research) reported their November measure of overall national manufacturing activity decelerated to 53.6% from 55.7% in October. The modest decline in the overall index did not ring any alarm bells among mortgage investors since the index remains consistent with the general view that industrial production growth and growth within the economy in general will be sustained into the foreseeable future. That perspective is already reflected on virtually every mortgage rate sheet in the marketplace.



In other news of the day the National Association of Realtors reported its Pending Home Sales Index (a measure of the number of contracts signed for the sale of existing homes) rose a better than expected 3.7% in October, its ninth consecutive monthly gain. The housing market, one the primary triggers of the worst U.S. recession in 70 years, continues to show signs of recovering from a three-year decline. However, many mortgage investors are discounting the current improvement in the housing market, reasoning that the recovery is artificially supported by tax credits for both first-time and move up borrowers and by mortgage interest rates resting near historical lows due to direct government intervention. This particular report will not likely exert much, if any influence on the direction of mortgage interest rates until/unless it reflects market conditions devoid of the massive but temporary government support programs.



To sustain the current level of mortgage interest rates will likely require softer-than-expected November employment numbers on Friday and/or a major sell-off in the stock markets. While both outcomes are certainly possible - they are each in their own right not very probable.
In my judgment, Friday's headline nonfarm payroll report will need to show the economy lost more than 150,000 jobs and/or the national jobless rate exceeded 10.3% last month in order to induce mortgage investors to push mortgage interest rates notably lower. In terms of stock market trading activity it will likely take a convincing move below the 10,200 mark for the Dow Jones Industrial Average before a sustained flow of capital out of the stock market could be counted on to support the prospects for notably lower mortgage interest rates.