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.