I think most seasoned mortgage investors will choose to discount rather sharply today's large 34,000 drop in the number of Americans standing in line to collect first-time unemployment benefits during the week ended December 25th.



Though it is true the labor sector appears to be making slow improvement, the weekly initial claims number this time of year typically overstates the employment story because of the difficulty of attributing for seasonality. Expect volatility in this data series to be high until the holiday employment factors completely "shake-out" by the first week or two of February.

Different day - same story.

Other than the initial jobless claims data for the week ended December 25th due out tomorrow morning - this week's economic calendar is completely void of anything that might cause a stir in the mortgage market.


Uncle Sam will wrap-up the last of his three-part auction schedule this week with today's sale of $29 billion worth of 7-year notes. The auction will conclude at 1:00p.m. ET.


If today's 7-year note auction is reasonably well-bid -- look for this event to be supportive of the prospects for steady to perhaps fractionally lower mortgage interest rates.

Price volatility in the mortgage market will be increasingly exaggerated as more and more market participants "close-the- books" on 2010. With bonus checks already cut - few traders will see reason to increase their risk positions before the New Year.



Against this backdrop today's modest decline in the initial weekly jobless claims was nothing more than a temporary distraction for traders. Early news from the housing sector did nothing but confirm the general consensus among market participants that housing starts and new housing construction in general are going nowhere anytime soon.



The $858 billion tax-cut extension plan that passed the Senate yesterday has now moved to the House of Representatives and may be presented for a vote by the end of the day. One would think the likely passage of this bill is already priced into the market - but as squirrely as trading activity as been of late - there is a risk that this event could take another sizable hunk out of current rate sheet prices.

The mortgage market beat a hasty retreat back to the price lows of the month this morning after reports on November retail sales and producer prices implied economic growth accelerated sharply in the current quarter. A stronger economy tends to push capital toward riskier assets like stocks at the expense of safe-haven assets like mortgage-backed securities.



The Commerce Department reported this morning that retail sales increased a solid 0.8%, advancing for a fifth straight month. November's gain came on top of an upwardly revised 1.7% gain in October. Excluding autos, growth was even faster in November, up 1.2%, after running at a slower pace in prior months. Consumers' spending behavior clearly shows increased optimism over the course of the last ninety-days. While the improved consumer outlook is good news for the prospects of future economic growth - it tends to be bad news for the potential of notably lower mortgage interest rates.



In a separate report the Labor Department said wholesale costs in November rose 0.8% -- the largest month-over-month increase in the past eight months. The big gain in the headline number was largely attributable to higher gasoline, heating oil, and fruit prices. Excluding the more volatile food and energy costs, the "core rate" of inflation at the producer level posted a more modest 0.3% gain. The trend trajectory of consumer demand may be reaching a high enough point that wholesalers may finally be able to push through their increased costs in the form of price increases. The mere whiff of these inflation implications were enough to pressure mortgage interest rates higher.



The last scheduled meeting of the Federal Open Market Committee got underway this morning at 8:30 a.m. and will conclude with the release of their post-meeting statement at 2:15 p.m. this afternoon. The message from the Fed is expected to include an acknowledgment that the economic outlook has improved over the past three months - but not at strong enough pace that committee members will likely consider scaling back their current $600 billion "QE2" spending spree. This event will not likely exert any influence on the direction of mortgage interest rates today.

Investors will look to the post-meeting statement from the Federal Open Market Committee tomorrow together with the snapshot of current inflation pressures at the wholesale and consumer level for cues to the likely direction of mortgage interest rates. If traders are comfortable with the level of inflation already priced into the mortgage market there is a better than even chance mortgage rates will creep fractionally lower. On the other hand, in the off-chance the data reveals inflation is running at a stronger than expected pace - look for mortgage interest rates to continue to move higher.




The "wildcard" of the coming week is the pending vote on extending the Bush era tax-cuts as well as preserving the emergency unemployment benefit program -- both originally scheduled to expire on December 31st. The "rumor mill" suggests a congressional decision may come as early as Monday. If the measure passes keep your fingers crossed that the majority of investors feel that the surge in inflation -- combined with the spike in the national debt load this piece of legislation is expected to create -- has already been well priced into the credit markets. If not, the upward spiral of mortgage interest rates will almost certainly continue - no matter what the data from the November Producer and Consumer price indexes might otherwise indicate.

Treading water.



Mortgage investors have largely gone to the sidelines today - waiting for the dust to clear from this week's roughly 200 basis-point price drubbing.



Investors will look to the post-meeting statement from the Federal Open Market Committee next week Tuesday together with the snapshot of current inflation pressures at the wholesale and consumer level for cues to the likely direction of mortgage interest rates. If traders are comfortable with the level of inflation already priced into the mortgage market there is a better than even chance mortgage rates will creep fractionally lower - probably at least into the end of the year. On the other hand, in the off-chance the data reveals inflation is running at a stronger than expected pace - look for mortgage interest rates to continue to move higher.



The "wildcard" of the coming week is the pending vote on extending the Bush era tax-cuts as well as preserving the emergency unemployment benefit program -- both originally scheduled to expire on December 31st. The "rumor mill" suggests a congressional decision may come as early as Monday. If the measure passes keep your fingers crossed that the majority of investors feel that the surge in inflation, combined with the spike in the national debt load this piece of legislation is expected to create, has already been well priced into the credit markets. If not, the upward spiral of mortgage interest rates will almost certainly continue - no matter what the data from the November Producer and Consumer price indexes might otherwise indicate.

Tuesday, December 7, 2010

Thin trading conditions are contributing heavily to this morning's sell off in the mortgage market.



The selling pressure is largely being created by the credit market's negative reaction to the announcement Congress has reached a compromise that will allow extending tax rates and jobless benefits until 2012. According to data compiled by Richard Rubin and Peter Cohn, writers for "Bloomberg.com" - extending all income tax rates for two years, along with renewal of business tax breaks, and renewal of the expanded unemployment insurance program could add about $750 billion to the federal deficit over the next decade. A rising federal debt burden at a time when the government's ability to service debt is deteriorating is not the "stuff" that lower mortgage interest rates are made of.



Credit markets are also under the shadow of more global events today.



The Irish parliament appears poised to pass a major austerity budget today and will likely pass a separate vote on social welfare measures on Thursday. If both measures are approved all conditions will have been met to enable Ireland to tap the $113 billion bailout package cobbled together by the European Central Bank and others. In the unlikely case one of these two measures fails to pass - the country would plunge into an even deeper fiscal crisis - an event that would compound growing contagion fears in the euro zone. A "no" vote" by the Irish parliament, should it come, will almost certainly cause capital to flee the uncertainties of euro zone for the relative safe haven of dollar denominated assets like Treasury obligation and mortgage-backed securities. Until the votes have been cast and tallied - I will continue to consider these two events to be mortgage market "wildcards".



Uncle Sam will be thrashing around in the credit market today looking to borrow $32 billion in the form of 3-year notes. This offering will likely draw decent demand - but not enough to create much of an overall improvement in investors' otherwise mortgage market unfriendly mindsets.



Looking ahead to the balance of the week the economic calendar is exceptionally light -- with little more than Thursday's initial weekly jobless claims number and October Wholesale Inventory data available for mortgage investors to chew on.

Friday, December 3, 2010

A swing and a miss.


Economists and analysis around the world were expecting a much stronger set of November payroll numbers than the Labor Department delivered this morning.



As the markets closed yesterday, participants were braced for a headline November payroll figure as high as 200,000 and a national jobless rate of 9.6% or lower. The actual numbers showed that the economy only created 39,000 more jobs than it lost last month while the national jobless rate surged to 9.8%. The September and October numbers were revised higher by a collective 38,000 jobs. Investors also made note of the fact that average hourly earnings remained flat last month - an indication that the consumer may not be in as good as shape to drive economic growth in the first-half of 2011 as most observers have been anticipating.



Judging by price action in the credit markets in the couple of hours following the release of the November nonfarm payroll data it appears that most market participants are choosing to largely shrug-off today's weak story from the job market as nothing more than the growing pains of an economy in transition from recession to recovery.



Looking ahead to next week the economic calendar is exceptionally light with little more than Thursday's initial weekly jobless claims number and October Wholesale Inventory data available for mortgage investors to chew on. The trend trajectory of mortgage interest rates over the coming five business days will be most strongly influenced by the Treasury Department's three scheduled auctions - Tuesday's $32 billion 3-year note sale, Wednesday's $21 billion 10-year note auction and Friday's $13 billion 30-year bond offering. The 3- and 10-year note offerings will likely draw decent demand - but the 30-year bond sale has the potential to create some notable upward pressure on mortgage interest rates. Heads up.

Thursday, December 2, 2010

And now the waiting begins.



Tomorrow morning's release of the November nonfarm payroll report is almost anti-climatic following yesterday's dramatic sell-off in the mortgage market. The trigger for the pounding mortgage interest rates took yesterday was a stronger-than-expected report from payroll company ADP that showed a 93,000 gain in private payrolls. But that was yesterday.



Today the Labor Department reported initial claims for government unemployment benefits rose a stronger-than-expected 26,000 to a seasonally adjusted 436,000 during the week ended November 26th. This morning's data will have no bearing on tomorrow's much more important nonfarm payroll report because it fell outside of the survey period for the monthly number. It does appear that this morning's weekly initial claims data has caused investors to reconsider some of the "wild-eyed" whisper-numbers that created such a panic in the market yesterday. A reading of 436,000 suggests the labor market is firmer than it was a few months ago but not yet at the point where the unemployment rate will start falling on a consistent basis. Typically, a noticeable decline in the number of unemployed workers will occur when the seasonally adjusted claims readings are below 400,000.



Most analysts are now anticipating Friday's November nonfarm payroll headline will likely show the economy created 145,000 more jobs than it lost last month while the jobless rate remained at 9.6% for the third consecutive month. If the headline number matches or falls below the consensus estimate, and prior months' revisions don't climb dramatically higher, this report will likely prove to be supportive of the prospects for steady to fractionally lower mortgage interest rates. It will probably take a November headline payroll number greater than 150,000 and a national jobless rate of 9.5% or less to drive mortgage interest rates notably higher from current levels.

Wednesday, December 1, 2010

The mortgage market took-one-on-the-chin this morning following the release of the November private employer report from ADP Employer Services.



According to data compiled by ADP -- private employers added a stronger-than-forecasted 93,000 jobs in November; the biggest one month rise in this metric since November 2007. The October private sector employment gain was revised up from the 43,000 originally reported to 82,000.



Most analysts are now assigning a better than 60% chance to the likelihood Friday's much anticipated November nonfarm payroll headline will exceed the economists' consensus estimate now calling for a gain of 150,000. After today's mortgage market swoon, I doubt a stronger-than-expected November report will cause much of a stir - but a number that matches or falls below the consensus estimate will almost certainly be mortgage market friendly. The ADP data is notorious for missing the government's numbers by a wide margin - so there is still a chance that a supersized jobs report on Friday is not completely "baked-in-the-cake."




Worth noting -- national recognized employment consultants Challenger, Gray & Christmas are reporting the number of planned layoffs rose in November to the highest level since March. According to company compiled data -- the number of employees that will be cut from corporate payrolls rose 28% from October to November.



In a separate report the government took a little more wind-out-of-the-sails of those who believe the labor sector is solidly on the road to recovery when it released the revised third-quarter productivity figures earlier this morning. The data showed productivity rose at an annual rate of 2.3% rather that the 1.9% originally reported, a clear indication employers squeezed more output from workers. Labor costs crept higher by a very modest 0.1%. As long as productivity continues to rise - the necessity of adding more headcount to corporate payrolls will remain low.



In other news of the day, the Mortgage Bankers of America reported their mortgage application survey for the week ended November 26th dropped 16.5% from the previous week. The lion's share of the decline was created by a slump in refinance requests which fell 21.6% during the period. The number of purchase applications increased by 1.1%. Refinance applications still account for 3 out of very 4 applications in process. The contract rate for 30-year fixed rate mortgages finished at 4.56%, up by 6 basis points from a week earlier, up 27 basis points from four weeks ago, and down by 23 basis points from the year ago mark.

Monday, November 29, 2010

Mortgage investors returning from the Thanksgiving Holiday are hopeful the Fed's planned purchase of $39 billion worth Treasury debt obligations this week will help support a market pounded by last week Wednesday's heavy selling. The price drubbing in the credit markets just before the holiday break was triggered in large part by a much stronger than expected weekly jobless claims number.



Even though last week's initial claims data fell outside of the survey period for Friday's much more important November nonfarm payroll statistics - mortgage investors will take turns scaring the heck out of each other with "whisper" numbers sharply higher than the expected 145,000 job gain already priced into the mortgage market.



If Friday's headline nonfarm payroll number posts a reading of 150,000 or more and/or should the national jobless rate slips to 9.5% or less - look for stocks to rally at the expense of higher mortgage interest rates. A softer than expected headline number and/or a jobless rate of 9.7% or higher will likely put a pretty sizable dent in stock prices while simultaneously restoring the shine to the prospects for notably lower mortgage interest rates.



For what it is worth -- data suggests Friday's nonfarm payroll will be stronger-than-expected. A stronger-than-expected November nonfarm payroll report will favor the stock markets at the expense of fractionally higher mortgage interest rates. Heads up.

Monday, November 22, 2010

Trading activity in the mortgage market so far today has been thin and listless.



There is a little bit of "flight-to-quality" buying seeping into the mortgage market as a result of Ireland's weekend agreement on an international bailout to save their swooning banking system.



Concerns about the package's impact on the Irish government's balance sheet and fears that the debt contagion might spread to other struggling European nation's sent global investors scurrying to park their capital in the relative safe-haven of dollar denominated assets like Treasury debt obligations and mortgage-backed securities.



The timing of all this "flight-to-safety" stuff could not have come at a better time for Uncle Sam. The Treasury Department will be in the credit markets over the next three day's peddling a total of $99 billion worth of debt obligations.



First up is today's sale of a $35 billion stack of 2-year notes - a security almost "custom fit" for risk adverse investors seeking a safe place to park money. If today's auction goes as well as expected -- it will tend to be supportive of the near-term prospects for steady to fractionally lower mortgage interest rates.



Just as reminder -- the mortgage market will operate on a normal schedule on Wednesday, November 24th, it will be closed on Thursday for the Thanksgiving Holiday and the mortgage market will operate on an abbreviated schedule on Friday, November 26th with an early close at 2:00 p.m. ET

Friday, November 19, 2010

Trading activity in the mortgage market so far today has been thin and listless. The economic calendar offered nothing for investors to chew on. Normally under these conditions mortgage investors tend to look to the stock markets for directional cues when setting rates and prices for the day - but nothing much is shaking in that arena either.



Looking ahead to next week -- Uncle Sam will be in the credit markets Monday through Wednesday conducting a $96 billion, three-part auction featuring 2-, 5- and 7-year notes. All three offerings will likely be well bid. If so, these events will not likely influence the direction of mortgage interest rates one way or the other.



The economic calendar will feature revised Q3 Gross Domestic Product figures on Tuesday. The Existing Home Sales and New Home Sales data will appear at 10:00 a.m. ET on Tuesday and Wednesday respectively. This battery of macro-economic data is individually and collectively expected to be mortgage market neutral.



The mortgage market will operate on a normal schedule on Wednesday, November 24th, it will be closed on Thursday for the Thanksgiving Holiday and the mortgage market will operate on an abbreviated schedule on Friday, November 26th with an early close at 2:00 p.m. ET.

Thursday, November 18, 2010

The number of people standing in line to file first-time jobless benefits rose slightly last week, but the underlying trend remained slanted toward improvement. During the week ended November 13th initial claims for unemployment benefits climbed 2,000 to a seasonally adjusted 439,000, according to the data wonks at the Labor Department. Until/unless the seasonally adjusted claims number can manage to fall to 400,000 or less on a sustained basis - this data will tend to support steady to perhaps fractionally lower mortgage interest rates.




This week's initial jobless claims data covered the survey week for the more important November nonfarm payroll report scheduled for release on Friday, December 3rd -- and did nothing to change mortgage investors' expectation that the economy probably created 100,000 more jobs than it lost this month. The economy needs to create at least 150,000 jobs every month -- just to absorb new entrants -- and will need to do considerably better than that to put a meaningful dent in the nation's almost 10% unemployment rate.

Wednesday, November 17, 2010

Today's economic news was generally supportive of the prospects for steady to fractionally lower mortgage interest rates. Consumer inflation was subdued in October and new home building slumped to it lowest level in more than 18 months.



The Labor Department said its Consumer Price Index rose 0.2% last month -- after edging up 0.1% in September. Excluding the more volatile food and energy price components, the so called "core" cost-of-living was flat for a third straight month in October. On a year-over-year basis the core consumer price index has risen by 0.6% -- the smallest gain since the Labor Department started keeping records of this inflation measuring series in 1958.




In a separate report, the Commerce Department said housing starts plunged by 11.7% in October. The lion's share of the decline in the housing starts figures was contributed by the multi-family component of the data. Starts of single-family homes were up 1.0% last month. Overall, building permits were 0.5% higher in October - with the single-family component of the data posting a 1.0% gain.



According to data compiled by the Mortgage Bankers of America interest rates near record-lows failed to prompt an increase in loan applications last week. While 30-year fixed rate mortgages hovered near the all-time low of 4.21% during the week ended October 8th -- overall loan demand slumped by 14.4% from the prior week. The sizable week-over-week decline was largely the result of a 16.5% drop in refinance applications. Demand for loans to purchase a home slumped by 5.0% over the same period. During the survey week the contract rate for 30-year fixed mortgages climbed 18 basis-points higher to 4.46%, up by 12 basis-points from four weeks prior, and down by 36 basis points from the year earlier mark.

Thursday, November 4, 2010

SORRY FOR MY ABSENCE THE PAST FEW DAYS...


The number of Americans standing in line to file first-time jobless benefits rose by a stronger-than-expected 20,000 last week. Today's jobless claims report will have no influence on tomorrow morning's far more important nonfarm payroll figures because the weekly data fell outside of survey period for the larger and more comprehensive October national employment figures.



In a separate report Labor Department figures showed third-quarter non-farm productivity rose a much stronger-than-anticipated 1.9% while unit labor costs, a gauge of potential wage driven inflation pressures watched by the Fed, dropped 0.1%.



Today's macroeconomic mumbo-jumbo collectively and individually tells a story of a labor market that is not improving as much as had been hoped. Until/unless the labor sector shows sustained improvement on both a week-over-week and month-over-month basis - this data will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates.




Most analysis believe tomorrow morning's 8:30 a.m. ET release of the October nonfarm payroll data will show the economy created roughly 75,000 more jobs than it lost - a condition that supported the national jobless rate at 9.6% -- the same level it has held since September. If this forecast proves accurate, the October payroll figure will be the first positive reading for the monthly jobs number since May. Investors have already priced in this expected outcome into the mortgage market - making an "as expected" report at best mortgage market neutral and at worst slightly mortgage interest rate unfriendly.



In order to be completely supportive of a notable move to lower rates and higher prices the October nonfarm payroll headline number will need to show the economy lost more jobs than it created while the unemployment rate edged up to 9.7% or higher. While such an outcome is certainly possible - at this juncture it does not appear to be very probable.

Wednesday, October 27, 2010

The Commerce Department reported earlier this morning that sales of new homes rose in September by 6.6% to an annual rate of 307,000 as compared to the prior month. Even with this month's gain, the pace of sales is barely above its 47-year low. Slow job growth, tight credit, and low consumer confidence remain the primary impediments to improvement in the housing sector. Nothing new here - so mortgage investors shrugged off the report.



In a separate release, the Mortgage Bankers of America reported their national mortgage application index, a combined view of the demand for both refinance and purchase money mortgages, climbed 3.2% higher during the week ended October 22nd. Purchase applications rose 3.9% following two consecutive weekly declines while refinance demand rose 3.0% after falling 11.2% the previous week. Refinance requests continue to represent four out of every five loan applications currently in process on a national basis.



Uncle Sam will be conducting an auction of $35 billion worth of 5-year notes this afternoon. The broad consensus among analysts is that this offering will be very well bid -- since both by rhetoric and by action the Fed is telegraphing their intention to maintain their benchmark interest rates at exceptionally low levels for an extended period of time.

Tuesday, October 26, 2010

Consumer Confidence improved slightly in October but remained at its second lowest level since February. The index rose to a reading of 50.2 from September's 48.6 mark. Consumer's buying plans remain weak, and only 9.1% of consumers expect their incomes to rise in the next six months.



Concerns about lack of job growth, slipping home values, and still tight credit conditions at the consumer level are the most obvious drivers of weak consumer confidence.



Until/unless those three primary elements collectively show sustained improvement over a multi-month period the prospects for accelerating economic growth remain small - a condition supportive of the prospects for steady to perhaps fractionally lower mortgage interest rates.




Uncle Sam will be conducting an auction of $35 billion worth of 2-year notes this afternoon. The broad consensus among analysts is that this offering will be very well bid -- since both by rhetoric and by action the Fed is telegraphing their intention to maintain their benchmark interest rates at exceptionally low levels for an extended period of time.

Monday, October 25, 2010

The National Association of Realtors reported this morning that September Existing Home Sales posted a stronger than expected month-over-month increase of 10.0% -- a value well above most economists' projections calling for a 4.0% improvement. That is the good news. The bad news is that even with the September improvement, we're still at remarkably depressed levels. Existing home sales are almost 20% below year-ago-levels. This data series will probably continue to be supportive of steady to fractionally lower mortgage interest rates until the fundamental driver of housing demand -- job growth - can generate sustained upward momentum - something most analysts do not expect to occur until mid-2011 at the earliest.




Credit market participants are bracing for a big four-part Treasury auction that kicks off this week. On the auction block today will be a $10 billion stack of 5-year inflation-indexed securities that will be followed by $35 billion of 2-year notes tomorrow, $35 billion of 5-year notes on Wednesday and will wrap-up with the sale of $29 billion of 7-year notes on Thursday. A consensus is building around the idea that the Fed will focus a large part of their "QE2" buying appetite on Treasury obligations with 5-year to 10-year maturities - an outlook that will likely prove very supportive for the majority of the offerings on the blocks for sale this week. If so, Uncle Sam's borrowing spree this week will not likely take much, if any toll on the current level of mortgage interest rates.

Thursday, October 21, 2010

Trading activity in the mortgage market is light again this morning. Investors have little to guide their rate setting decisions so the majority of them appear content to move to the sidelines as they await next week's big $109 billion four-part Treasury auction, a 2-day Federal Open Market Committee meeting, the results of the midterm elections and the release of the October nonfarm payroll report. Under current market conditions look for trading action in the mortgage market to be more sideways rather than directional for the balance of the week.




The Labor Department reported earlier this morning that initial claims for state unemployment benefits fell 23,000 during the week ended October 16th. The prior week's figures were revised up by 13,000, to the highest level since late August. Those workers who have used up their traditional benefits and are now collecting emergency and extended government payments increased by roughly 279,000 to 5.07 million during the latest reporting period. Most investors see this report as making it all but certain the Fed will launch another round of quantitative easing at the conclusion of their meeting on Wednesday, November 3rd. This expectation is already priced into the mortgage market so when the announcement is formally made - the reaction as reflected on investors' rate sheets will likely be muted.



There are a number of reasons to believe "the Dow and the Nasdaq will likely put in a cycle high this week - probably on Wednesday or Thursday." If that assessment proves accurate, the migration of capital leaving riskier assets like stocks for the safety of the Treasury and mortgage-backed security markets should prove supportive of the prospects for steady to perhaps fractionally lower mortgage interest rates this week.

Wednesday, October 20, 2010

Trading activity is light this morning in the mortgage market. Investors have little to guide their rate setting decisions.



The Mortgage Bankers of America said its seasonally adjusted index of mortgage applications, a value which includes both purchase and refinance loans, slumped 10.5% during the week ended October 15th. Demand for home refinancing fell for the sixth time in seven weeks - dropping by 11.2%. Purchase application requests slid 6.7% lower.



While it is true that interest rates on 15- and 30-year fixed-rate mortgages rose for the first time in six weeks during the survey period - they are still within shouting distance of their record all-time lows.



The Fed will release their "Beige Book" this afternoon at 2:00 p.m. ET. This report, named for the color of its cover, is a compilation of economic reports from all 12 Federal Reserve districts. The tone of these regional surveys will generally be gloomy - especially in terms of the employment picture. The chance any of the data contained in the "Beige Book" will surprise mortgage investors is small. This report will not likely exert any noticeable influence on the current trend trajectory of mortgage interest rates.

Tuesday, October 19, 2010

The Commerce Department reported earlier this morning that housing starts unexpectedly rose in September to a five-month high, but permits for future home construction fell 5.6% -- driven by a sharp decline in permit filings for multi-family construction. This data had little impact on mortgage investors expectations the Fed will launch another round of economic stimulus at the conclusion of their upcoming two-day Open Market Committee meeting on November 2nd and 3rd.

Monday, October 18, 2010

After booming for more than a year, the manufacturing sector of the economy is starting to show signs of cooling off from its red-hot growth pace. Industrial production fell 0.2% in September - marking its biggest decline since June 2009.



Capacity Utilization, a measure of how much of a factory's total production quotient is in use, decreased to 74.7% last month from 74.8% in August. By comparison, the gauge averaged 80% over the past 20-years. It is abundantly clear to mortgage investors that capacity utilization remains well below levels where inflation inducting production bottlenecks might be expected to occur.



News of soft production growth together with a benign inflation measure from the manufacturing sector are supporting steady to slightly lower mortgage interest rates today.



There are a number of reasons to believe the Dow and the Nasdaq will likely put in a cycle high this week - probably on Wednesday or Thursday. If the assessment proves accurate, the migration of capital leaving riskier assets like stocks for the safety of the Treasury and mortgage-backed security markets should also prove supportive of the prospects for steady to perhaps fractionally lower mortgage interest rates this week.

Friday, October 15, 2010

The Commerce Department reported this morning that retail sales rose a stronger-than-expected 0.6% in September, lifted by big ticket items like autos, electronics and appliances. The August figure was revised higher as well to show a gain of 0.7% versus the 0.4% gain originally reported. Excluding autos, September sales were up 0.4%, essentially matching the consensus estimate. Consumer spending accounts for roughly 70% of the nation's economic activity, so an improved picture for overall third-quarter performance will tend to limit the ability of mortgage interest rates to make a notable move to lower levels as investors anticipate a rising demand for capital to finance the prospect of budding new business opportunities.




In a separate report the Labor Department said their September Consumer Price Index showed inflation rose at a slower-than-expected pace last month. The overall consumer price index rose just 0.1% while the core rate, a value which excludes the more volatile food and energy price components, remained unchanged for the second straight month.




This low inflation environment is bothersome for Fed Chairman Bernanke and a majority of his fellow central bankers. Mr. Bernanke, speaking at a conference sponsored by the Boston Federal Reserve Bank this morning, said high unemployment and low inflation point to a need for further easing of monetary policy. His comments removed any remaining doubt among credit market participants that another round of economic stimulus from the Fed is on the way. The Fed is broadly anticipated to formally announce the deployment of "QE2" at the conclusion of the two-day Open Market Committee meeting on November 3rd. The dollar size of the Fed's commitment is still vague and many analysts, including the Fed Chairman himself, question the likely effectiveness of this new program in regard to making a dent in the nation's stubbornly high jobless rate.




The one thing nobody doubts is the Fed's intent to do as much as is required to drive the inflation rate at both the producer and consumer level higher - viewing the achievement of that objective as tangible proof the gears of economic growth are once again beginning to turn. While there are those who question how much "bang-for-the-buck" in terms of economic growth the Fed will actually recognize for their effort - there are few who doubt rising inflation pressures will push mortgage interest rates higher.



Looking ahead to next week the economic calendar is populated with second-tier reports ranging from Monday's September Industrial Production and Capacity Utilization figures, Tuesday's September Housing Starts and Building Permits stats, and Thursday's Initial Jobless Claims data. With so little to "chew on" - it is likely the trend trajectory of mortgage interest rates will be largely governed by trading action in the stock markets. Higher stock prices will tend to put upward pressure on mortgage rates while lower stock prices will probably foster steady to perhaps fractionally lower rates.

Thursday, October 14, 2010

New first-time claims for jobless benefits filed during the week ended October 9th were higher than expected -- and added another degree of certainty to investors' presumption that Fed Chairman Bernanke and his fellow central bankers will vote by November 3rd to pump significantly more money into the economy.




The Labor Department reported earlier this morning that initial weekly jobless claims rose by 13,000 to 462,000 during the latest survey period. Until/unless the total number of initial jobless claims falls to 400,000 or less on a week-over-week basis -- this data series will tend to support steady to perhaps fractionally lower mortgage interest rates.




The Labor Department also reported this morning that the headline September Produce Price Index doubled expectations, rising 0.4% during the month. The so called "core" producer price index, a component of the broader report that excludes the more volatile food and energy costs, rose a modest 0.1%. On a year-over-year basis inflation at the gate of the nation's farms and factories is running slightly hotter than most analysts had anticipated.


We will find out tomorrow morning whether wholesalers of goods and services have been able to generate enough pricing power to push through their rising costs to consumers - or whether these businesses are continuing to absorb the price increases themselves. The Labor Department will release the September Consumer Price Index figures at 8:30 a.m. ET.



Uncle Sam will wrap up the last of his three-scheduled debt auctions for this week with the sale of $13 billion worth of 30-year bonds this afternoon. Tuesday's three-year note sale and yesterday's ten-year note sale drew half-hearted bidding from market participants - and today's offering won't likely break the string. The auction concludes at 1:00 p.m. ET.


As long as this debt offering is not a complete bust with respect to bidding activity -- there is a chance we may see a modest post-auction "relief rally" develop in the government debt market. If so, look for a post-auction "relief rally" to limit or perhaps completely reverse this morning's light round of selling pressure in the mortgage market.

Wednesday, October 13, 2010

Just because yesterday's 3-year note auction was a bust - it does not mean today's $21 billion sale of 10-year notes will be poorly bid as well. Right now the yield of the 10-year note is hovering above 2.45% -- the center-point of its multi-day trading range. The probabilities are high investors will view the current yield especially attractive as speculation heats up regarding another round of aggressive buying by the Fed before the year is out.



If, as most market participants expect, the Fed does launch their so called "QE2" financial stimulus program at the conclusion of their next scheduled meeting on November 3rd - the "sweet spot" for the Fed's buying appetite will probably be found among Treasury debt obligations with maturities between five to 10 years - a expectation that will not likely be lost on the bidders at today's auction. Uncle Sam's 10-year note auction will conclude at 1:00 p.m. ET.



As a side bar to the "QE2" discussion - it is worth noting that the Fed is not expected to revisit their direct mortgage-backed security purchase program this year - but if the economy does not pick-up by mid-2011 - it would not be particularly surprising to the see the Fed start writing checks for the direct purchase of mortgage-backed securities as an additional part of the "QE2" stimulus initiative.




Earlier today the Mortgage Bankers of America released their mortgage application survey data for the week ended October 8th. According to the MBA, mortgage applications for home refinancing rose for the first time in six weeks, with demand jumping to its highest level since August as eligible homeowners scrambled to avail themselves of record low interest rates. Refinance requests continue to represent four out of every five loans in the national mortgage pipeline. The tighter FHA mortgage requirements which took effect on October 4th no doubt took a toll on purchase activity. Until/unless these super-tight credit and appraisal standards are relaxed a little -- it will be difficult for the industry to see much improvement in the loan production mix.




The MBA's seasonally adjusted index of all mortgage applications, a composite of both purchase and refinance loan requests, increased 14.6% last week, with total volume surging to its highest mark since May 2009. Refinance applications were up 21% while purchase activity slumped by 8.5%. 30-year fixed-rate mortgages, excluding fees, averaged 4.21% -- their lowest level since the MBA began keeping records in 1990.

Tuesday, October 12, 2010

The two strongest influences on the direction of mortgage interest rates today will be investor reaction to the text and tone of the minutes from the Federal Open Market Committee meeting held on September 21st - and the results of the Treasury's 3-year note auction. At 1:00 p.m. ET the Treasury Department will drop the gavel on the sale of $32 billion worth of three-year notes and an hour later the minutes of the September Fed meeting will hit the news wires.


Most analysts believe domestic and foreign investors will show a strong bidding appetite for today's 3-year note offering despite record low yields. Cash managers will look to stash their money in these relatively short-term securities since the economy looks doomed to many more months of puny growth. Traders making bets that the Federal Reserve will launch another big direct purchase program before the end of the year will also not likely be shy with their bids at this afternoon's auction. Look for this event to be mortgage market neutral.



The minutes of the September 21st Fed meeting may reflect some divisions among central bankers over whether to launch another big round of direct Treasury debt purchases. Investors seem firmly convinced that the dissenters will be voted down -- and Fed Chairman Bernanke and other more aggressive members of the Federal Open Market Committee will pull the quantitative easing trigger, probably as soon as their next meeting on November 2nd and 3rd. While action from the Fed seems almost assured, don't bank on the Fed performing major miracles for the mortgage market. They will likely begin rather small, particularly since this tactic's effectiveness is still highly debatable. Most observers believe the Fed will launch their new initiative by buying $80 to $100 billion worth of Treasury debt over the six weeks between each Open Market Committee meeting. At that pace, the Fed's so called "QE2" economic stimulus plan will not likely drive mortgage interest rates much lower than current levels. Don't lose sight of the fact that if the Fed is successful in stimulating economic activity through this new effort - the attendant rise in inflation pressures will almost certainly serve to tilt the trend trajectory of mortgage interest rates in favor of higher rates and lower investor prices

Friday, Ocotber 8, 2010

The Labor Department reported earlier this morning that the economy shed more jobs in September than the vast majority of analysts had anticipated. September marked the fourth straight month the economy created fewer jobs than it lost. Nonfarm payrolls dropped 95,000 last month. Private employment increased 64,000, less than expected, while government payrolls declined by 159,000 jobs, including 77,000 Census workers. The employment rate remained unchanged at 9.6% -- held down by fewer new entrants joining the labor force and more discouraged workers giving up the job search and moving to the sidelines.



The jobless rate has equaled or exceeded 9.5% for 14 consecutive months, surpassing the 13-month period from mid 1982 to 1983 as the longest span of elevated joblessness since monthly records began in 1948. The length of the average work week and average hourly earnings were both unchanged on a month-over-month basis.



Today's dismal employment report essentially guarantees the Fed will choose to launch another quantitative easing effort - with a formal announcement likely coming by the conclusion of the Federal Open Market Committee's 2-day meeting on November 2nd and 3rd. Mortgage investors have already largely priced-in expectations that the Fed will authorize the direct purchase of at least $1 trillion worth of Treasury debt obligations as part of their effort to rekindle economic activity.



Looking ahead to the coming week Uncle Sam will be conducting a three-part debt auction from Tuesday through Thursday, composed of 3- and 10-year notes together with a batch of 30-year bonds. The inflation data contained in Thursday's producer price index and Friday's consumer price index is expected to be mortgage market neutral. Friday's September Retail Sales number is also not expected to cause much of a stir in the mortgage market.


IN THE MEANTIME - REFI NOW - FIXED RATES IN THE 3'S AND ARM RATES IN THE 2'S...C'MON NOW...CONTACT ME TODAY anagel@acfloans.com

Thursday, October 7, 2010

Initial claims for state unemployment benefits dropped 11,000 to a seasonally adjusted 455,000 according to data released by the Labor Department earlier this morning. It is very important to note that this data will have no bearing on tomorrow's much more important September nonfarm payroll figures -- because the weekly data fell outside of the survey period for the monthly headcount.


The second straight week of seasonal declines in the number of workers standing in line to file first-time jobless benefits pushed them further away from the nine-month high of 504,000 set in August. Weekly claims are now in the upper end of the 400,000 - 450,000 range that analysts normally associate with labor market stability. The number of people still receiving benefits after an initial week of aid dropped by 48,000 while the number of people receiving emergency jobless benefit extensions from the government increased by 157,000+.


Most mortgage investors have already set their hedges in front of tomorrow's 8:30 a.m. ET release of the September nonfarm payroll figures and have now moved into "wait-and-see" mode. While most believe the private sector produced a net gain of some 80,000 jobs last month -- state and federal governments likely experienced a net job loss of almost the same number. If this assessment proves accurate, selling pressure in the mortgage market will likely develop as traders scramble to unwind losing bets that net job loss in September would be much higher. It will likely take a net job loss of 25,000 and/or a jump in the national jobless rate to 9.8% or more to trigger a notable rally to yet lower rates and higher prices. Heads up.

Wednesday, October 6, 2010

IT'S GAME TIME!!! REDS WILL ROLL IN PHILLY!!!


A surprising contraction in private payrolls last month has contributed in large-part to this morning's rally in the mortgage market.



ADP Employer Services said private payrolls fell by 39,000 jobs in September, from an upwardly revised gain of 10,000 in August. Analysts had been looking for an increase of 24,000 jobs in September. Many see the ADP data hinting at a worst-than-expected headline September nonfarm payroll number from the Labor Department on Friday.


If that expectation proves accurate, and the economy created fewer jobs than it lost last month, another round of quantitative easing from the Fed will be a "done deal." Look for another $1 trillion of stimulus from the Fed will probably result in a maximum of a 25 basis point drop in 30-year mortgage interest rates from current levels.



More experienced market participants will likely be hesitant to read too much into the ADP Employer Services data since it has underperformed the government's more important nonfarm payrolls figures by 80,000 over the past six months. According to data compiled by Timothy Horman, columnist for Bloomberg.com -- over the past six months, ADP's initial figures were closest to the Labor Department's first estimate of private payrolls in May, when it overstated the gain in jobs by 14,000. The estimate was least accurate in April, when it underestimated the employment gain by 199,000. Assigning a lot of creditability to the ADP number seems to be akin to calling a kid a pitching "ace" because he threw the ball six times -- and all six pitches hit the backstop.



In a separate report, the Mortgage Bankers of America announced that their composite mortgage application index fell by 0.2% during the week ended October 1st. Refinance demand dropped by 2.5% on a week-over-week basis while purchase applications posted a gain of 9.3% for the period.

Tuesday, October 5, 2010

Look for the mortgage market to trade in a very tight range today as mortgage investors continue to speculate on the size of the Federal Reserve's quantitative easing 2.0 program. Some analyst have estimated the Fed will buy at least another $1 trillion of Treasury debt obligations while others have predicted the Fed will buy $80 to $100 billion between Open Market Committee meetings until the economy generates enough sustained growth momentum to justify ending the program. The Fed is broadly expected to launch this second round of quantitative easing as early as the next meeting of the Federal Open Market Committee, scheduled for November 2nd and 3rd.



Quantitative easing is a process wherein the Fed prints dollars and uses the cash to directly purchase Treasury debt obligations in the open market - with the expressed intention of rekindling economic activity to the level that inflation pressures grow and the threat of a downward recessionary spiral dissipates. Keep-in-mind should the Fed be successful in this endeavor -- the longer-term upward pressure on note rates will be far more significant that any support this strategy may give to the short-term prospects for steady to fractionally lower mortgage interest rates. Be at least a bit skeptical of some who claim the coming round of "quantitative easing" from the Fed will virtually guarantee a 3.5% or lower target for 30-year conforming fixed rate mortgages.



The dynamics of the next effort by the Fed to simulate economic growth will be largely determined by Friday morning's September nonfarm payroll report. If last month's data shows the economy lost more jobs than it created -especially if the private sector component of the report shows renewed weakness -- the actual dollar size of the Fed's direct government debt purchase program will likely increase dramatically. In the off-chance the September nonfarm payroll data shows positive job growth - particularly in the private sector - the Fed will likely choose to take a more cautious approach toward injecting more stimulus into the economy.



The credit markets have already rallied quite a bit as investors have been buying up all manner of government debt obligations in anticipation the Fed will soon resume large-scale purchases of these assets. A stronger-than-expected employment report on Friday will take a considerable amount of the wind-out-of-the-sales out of investors' current front-running strategy. If so, look for a mad rush to the market exists to develop as investors scale back their estimate of the Fed's forward looking buying interest - a condition almost sure to put upward pressure on Treasury yields and mortgage interest rates alike.



The Institute of Supply Management reported earlier this morning that its measure of activity in the service sector of the economy, a sector which accounts for two-thirds or more of all economic activity, accelerated last month more rapidly than most economists had expected. The ISM said its services index rose to a reading of 53.2 in September from 51.5 in August. The report's employment component rose to 50.2 last month after having dipped to 48.2 in August.



New orders also showed a solid improvement rising to 54.9 from 52.4. This survey covers industries that range from utilities and retailing to health care, housing, finance and transportation. Today's results suggest that after a brief hiccup in late summer, the handoff from manufacturing to service sector led growth is slowly taking place. The current pace of growth is probably not fast enough to dissuade the Fed from giving the "green-light" to another round of economic stimulus.

Monday, October 4, 2010

The mortgage market is the beneficiary of a round of "flight-to-quality" buying by domestic and foreign investors this morning spawned by new terror warnings for Europe and word that Swiss Banks may have to almost double their capital reserves.



These two events are currently little more than background noise compared to the growing chatter regarding the increasing likelihood the Fed will launch a second round of quantitative easing as early as the next meeting of the Federal Open Market Committee scheduled for November 2nd and 3rd.


Quantitative easing is a process wherein the Fed prints dollars and uses the cash to directly purchase Treasury debt obligations in the open market - with the expressed intention of rekindling economic activity to the level that inflation pressures grow and the threat of a downward recessionary spiral dissipates.


Keep-in-mind should the Fed be successful in this endeavor -- the longer-term upward pressure on note rates will be far more significant that any support this strategy may give to the short-term prospects for steady to fractionally lower mortgage interest rates. For this reason be at least a bit skeptical of some who claim the forth coming round of "quantitative easing" from the Fed will virtually guarantee a 3.5% or lower target for 30-year conforming fixed rate mortgages.



In terms of economic news the National Association of Realtors said its Pending Home Sales Index, based on contracts signed in August, increased 4.3% from month earlier levels. It was the second straight month of gains in the index. The data shows home sales have stabilized at very low levels. From this statistical floor, we could see some good percentage increases for the pace of the pending home sales index without representing a notable uptrend in housing conditions. Look for mortgage investors to shrug this data off as they did today - for many months yet.



In a separate report the Commerce Department said factory orders fell 0.5% last month. As you are probably aware, manufacturing activity has been the primary driver behind what little economic growth the country has experienced so far this year. The latest data shows the stockpile rebuilding that has been at the center of the surge in manufacturing demand will likely provide less of boost to growth through the balance of the year. This tidbit of news from the manufacturing sector was broadly anticipated - rendering it essentially "toothless" with respect to its impact on the mortgage market today.

Tuesday, September 28, 2010

Mortgage interest rates got a nice little nudge to lower levels as investors reacted to this morning's sharply lower than anticipated reading for September consumer confidence. This measure of consumer sentiment posted its third decline in the last four months and easily wiped-out the August gain.


The size of the decline in consumer confidence has increased concerns among credit market participants that the U.S. may yet face the threat of a double dip recession. The data clearly indicates consumers remain depressed about their financial prospects and view current economic conditions as inescapably recessionary.


The good news here is that this data is definitely supportive of steady to perhaps fractionally lower mortgage interest rates. The bad news is as long as consumers remain in their foxholes with their helmets on and their heads down -- the number of prospective borrowers interested and/or capable of initiating transactions featuring record all-time low mortgage rates will continue to shrink.



Investors will now turn their attention to this afternoon's five-year Treasury auction, the second of three Treasury note sales scheduled for this week.


Most analysts are anticipating good foreign participation at this afternoon's $35 billion 5-year note sale, particularly from Japan's central bank as they move to recycle their recent currency intervention reserves into dollar denominated assets like Treasury obligations and agency eligible mortgage-backed securities. Renewed financial concerns regarding the fiscal viability of Portugal and Ireland will likely serve as a catalyst to drive capital into the comparatively safe-harbor of U.S. government debt as well.



A well bid 5-year note auction will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates. The auction will conclude at 1:00 p.m. ET -

Monday, September 27, 2010

With nothing in the way of market moving economic data available today, this afternoon's two-year Treasury auction, the first of three Treasury note sales this week, will be the most prominent feature influencing the trend trajectory of mortgage interest rates over the course of this trading session.



Most analysts are anticipating good foreign participation at this afternoon's $36 billion 2-year note sale, particularly from Japan's central bank as they move to recycle their recent currency intervention reserves into dollar denominated assets like Treasury obligations and agency eligible mortgage-backed securities. Renewed financial concerns regarding the fiscal viability of Portugal and Ireland will likely serve as a catalyst to drive capital into the comparatively safe-harbor of U.S. government debt as well.



A well bid 2-year note auction will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates.

Friday, September 24, 2010

In the first of two economic reports released this morning the Commerce Department said orders for durable goods (items manufacturered to last three years or more) fell 1.3% in August, reflecting a sharp decline in orders for transportation equipment. But a barometer of capital spending by businesses rose a surprisingly strong 4.1% -- igniting a rally in the stock market and producing a sell-off in the mortgage market as investors scale-backed their outlook for a "double-dip" recession before the year is out.



The Commerce Department's second report of the day showed new home sales were flat in August at the second lowest level on record. Compared with August 2009, new home sales are down 28.9%. Mortgage investors gave this data little more than a passing glance since all market participants are keenly aware a recovery in the housing sector will not begin until joblessness and sagging consumer confidence show sustained multi-month improvement.



Looking ahead to next week Uncle Sam will be in the credit markets from Monday through Wednesday conducting a three-part auction featuring 2-, 5-, and 7-year notes. Thursday's weekly initial jobless claims data and Friday's Institute of Supply Management's Manufacturing Index will dominate the economic calendar.


Mortgage investors are currently expecting weekly claims to drift 7,000 lower while the ISM's manufacturing index hovers at 54.5. Should claims fall more strongly and/or should the manufacturing index show a reading greater than 54.5 look for upward pressure on mortgage interest rates to increase.


Numbers that match or fall below the consensus estimate for one or both of these reports will tend to support steady to perhaps fractionally lower mortgage interest rates. Consider the latter to be the high probability outcome scenario.

Thursday, September 23, 2010

Early this morning the Labor Department released their initial jobless claims data for the week ended September 18th. The government says the number of people standing in line to collect first-time jobless benefits grew by an unexpected 12,000 last week. The total number of claimants receiving benefits declined, while those getting extended payments rose.


The latest increase in the initial weekly jobless claims data puts an end to the string of two straight weekly drops. Looking through the weekly fluctuations, it becomes readily apparent that weekly jobless claims figures have changed little over the course of the year; the four-week moving average of claims is only 1,000 higher than its mark for the first full week of 2010.


In a nut-shell the story here is that the labor market will remain weak until demand for American goods and services accelerates to the point that business managers deem it once again financially feasible to hang out the "job opening" signs.



As all the saber rattling and political posturing of the coming months intensifies -- don't lost sight of the fact that while the Fed can trot-out another massive "quantitative easing" program to reduce the disinflation threat - the lower interest rates the central bank will attempt to create will do little to directly affect employment. Improved employment prospects depend on business confidence -- which in turn depends largely on supportive fiscal and regulatory initiatives - both of which happen to be the direct domain of Congress. The results of mid-term elections and the following congressional legislative action (or lack thereof) will have a far larger and potentially more immediate impact on the nation's labor sector than will any "quantitative easing" strategy the Fed might employ.



In other economic news of the day -- the National Association of Realtors reported August Existing Home Sales rose in August. That is the good news. The bad news is that existing home sales rose to the second-lowest level on record. Purchases of existing houses climbed to a 4.13 million annual pace, second only to July's 3.84 million rate. Job recovery continues to be the primary key to housing recovery.



These two reports, initial weekly jobless claims and existing home sales, simply added a little color to mortgage investors' developing picture of an economy slowly limping away from the longest and deepest recession since the end of World War II.

Wednesday, September 22, 2010

It is all about perception.



Yesterday the majority of investors analyzing the Federal Reserve's post-meeting policy statement came to the collective conclusion the text and tone of the document indicated the day is closer that the nation's central bank will launch a new "quantitative easing" campaign featuring the aggressive open-market purchases of Treasury securities. The "quantitative easing" campaign, should it become a reality, will be made in an all-out effort to bolster the economy. Based solely on what they perceived the Fed's post-meeting statement to say -- euphoria swept the credit markets yesterday afternoon helping to propel mortgage note rates back down toward levels last seen just after the Labor Day Holiday break.



I don't want to rain on anybody's parade -- but there are a couple of points related to yesterday's Fed statement I think prudent pipeline risk managers should be aware of. (1) The Fed has made no promise to buy even one more dollar's worth of Treasury debt. They did imply that a weak economy could lead to further direct purchases of Treasury debt obligations if needed to support the economic recovery and to spur an uptick in the pace of inflation over time. (2) If the Fed does indeed initiate a new "quantitative endeavor" and is successful in achieving its objectives -- one of the residual credit market effects will be a notable increase in the upward pressure on mortgage note rates.



I also think it is worth noting that just prior to the conclusion of yesterday's Federal Open Market Committee meeting, the National Bureau of Economic Research, the largest economic research organization in the United States and the entity tasked with determining the economic cycles of recession and expansion, announced that according to their data, the worst recession since the 1930's ended in June 2009.




Look for strong debate to develop over the next couple of weeks focused on just how effective further direct Fed debt purchases will likely be at this juncture in the economic cycle. One of the center-point questions of the upcoming debate will be, "Is the benefit of expanding the Fed's $1 trillion dollar existing investment portfolio really worth the erosion of global confidence in the credit worthiness of the United States - not to mention the domestic inflation pressures another round of unrestrained dollar printing could ignite?" I don't pretend to have the answer to these questions -- but I certainly understand the stakes are high in terms of what, if anything, the Fed actually chooses to do in terms of providing further "accommodations" for economic growth. I sense this one of those situations where you have to be careful what you wish for.



Speaking of interest rates and mortgage loan demand - earlier this morning the Mortgage Bankers of America released their mortgage application index for the week ended September 18th. The index showed that even though mortgage interest rates matched their lowest level in 20-years during the reporting period - home loan demand fell for the third consecutive week. The aggregate demand for both purchase and refinance applications dropped by 1.4% with purchase demand down 3.3% and refinance requests off 0.9%. The clear story coming from the housing sector is that lower mortgage interest rates don't stimulate activity - the housing sector is driven by job creation. Until/unless the story improves significant in the labor sector - dramatically lower mortgage interest rates are not likely going to make a notable difference in home loan demand.

Tuesday, September 21, 2010

This week's trading action in the mortgage market will be largely driven by the message the Federal Open Market Committee sends in its post-meeting statement this afternoon (2:15 p.m. ET).


Market participants around the globe will tune-in to hear what the Fed has to say about the current level of benchmark short-term interest rates, the pace of economic recovery, the job growth outlook and what, if anything, the nation's central bankers intend to do should economic conditions worsen.



In the end the Fed is unlikely to provide anything new and substantive for credit market participants to chew-on. If this assessment proves accurate, look for investors to register their disappointment by pushing mortgage rates slightly higher.


I'll provide an update to this commentary as soon as possible following the conclusion of today's meeting.


Earlier this morning the Census Bureau released the August Housing Starts and Building Permit figures. Total housing starts increased 10.5% last month - its strongest month-over-month gain in nearly a year. Building permits did not fare nearly as well - posting a month-over-month gain of 1.8%. Even with the outsized August gain, housing starts remain below 600,000 annualized units - a benchmark that they have only breached briefly in the first quarter of the year. Until/unless the labor sector shows signs of sustained improvement - homebuilding activity will undoubtedly remain at depressed levels. Mortgage investors gave this data nothing more than a disinterested glance.

Monday, September 20, 2010

This week's trading action in the mortgage market will be largely driven by the message the Federal Open Market Committee sends in its post-meeting statement tomorrow afternoon (2:15 p.m. ET).



Market participants around the globe will tune-in to hear what the Fed has to say about the current level of benchmark short-term interest rates, the pace of economic recovery, the job growth outlook and what, if anything, the nation's central bankers intend to do should economic conditions worsen.



In the end the Fed is unlikely to provide anything new and substantive for credit market participants to chew-on. If this assessment proves accurate, look for investors to register their disappointment by pushing mortgage rates slightly higher. Any initial move to higher rates will likely be short-lived (by a day or two) as it dawns on the majority of market participants that additional support for steady to lower interest rates from the Fed is virtually inevitable as the economy continues to show little sign of gaining any traction in terms of job creation and overall growth.

Friday, September 17, 2010

Mortgage investors are putting the finishing touches on their risk management positions this morning before largely slipping out early this afternoon for what promises to be a very nice last weekend of summer for much of the country.



The Labor Department released its August Consumer Price Index data earlier this morning - and mortgage investors yawned. The headline measure of inflation at the consumer level showed a gain of 0.3% last month - slightly stronger than expected - but that gain was offset by the unexpectedly flat reading for the more important core component of the index (a value which excludes volatile food and energy costs). The year-over-year rate of both headline and core consumer price inflation remains stable at 1.0% -- a condition that sharply reduces the likelihood of a pronounced and sustained upward move for mortgage interest rates - at least in the near-term.



Looking ahead to next week the Federal Open Market Committee will huddle for a one-day monetary policy strategy discussion on Tuesday, September 17th. Central bankers will weigh their diverging views on the how the economy is likely to perform next year and will debate their respective theories on how best to re-fire the nation's economic engines. When they release their post-meeting statement at 2:15 p.m. ET it will likely reveal the Fed chose to remain on the sidelines and watch a bit longer before taking any form of action. Such an outcome is already priced into the mortgage market -- so if this assessment proves accurate -- the Fed meeting will be a nonevent with respect to the current trend trajectory of mortgage interest rates.



News from the housing sector will dominate the balance of next week's economic calendar - ranging from Tuesday morning's August Housings Start and Building Permit numbers through the existing and new home sales data on Thursday and Friday respectively. The collective story is expected be one of almost imperceptible improvement - a condition not likely to cause mortgage investors to aggressively push mortgage interest rates notably higher.



For the remainder of the day look for mortgage interest rates to take their directional cue from trading action in the stocks markets. Higher stock prices will tend to draw mortgage interest rates fractionally higher. With mortgage note rates currently floating either at, or within a breath of their all-time historical lows, falling stock prices will not likely serve to push these note rates appreciably lower - though mortgage investor pricing may improve a little.

Wednesday, September 15, 2010

Trading activity in the mortgage market this morning appears to be stuck in neutral - volume is light and directionless.


This morning's earlier release of the "as-expected" August Industrial Production and Capacity Utilization numbers together with a slightly softer-than-anticipated measure of manufacturing activity in the New York Federal Reserve district drew nothing more than a passing glance from traders.



Overnight Japan moved aggressively to sell yen in the international currency markets in an attempt to jump start its economic engines. The news garnered some early attention from market participants -- but when it became apparent that no other countries were going to join Japan in their first currency intervention endeavor in more than six years -- mortgage investors were quick to shrug the whole thing off.



Looking ahead to the balance of the week most analysts believe the release of tomorrow morning's August Producer Price Index followed on Friday by the August Consumer Price Index will prove of little help to investors attempting to plot the forward looking trajectory of the economy. If that assessment proves accurate, look for mortgage interest rates to generally take their directional cues from trading action in the stocks markets.



Higher stock prices will tend to draw mortgage interest rates fractionally higher. With mortgage note rates currently floating either at, or within a breath of their all-time historical lows, falling stock prices will not likely serve to push these note rates appreciably lower - though mortgage investor pricing may improve a little.



There are reasons to believe the Dow will probably put in a multi-day high between 10550 and 10650 before the close of trading on Friday.

Monday, September 13, 2010

The credit market is undergoing a technically driven adjustment this morning as last week's $67 billion of Treasury obligations and the biggest supply of long-dated corporate debt issues since last March are redistributed by primary dealers and big-money center banks. Risk management strategies established prior to the deluge of supply washed into the credit markets last week are being reversed this morning as well - contributing in part to the early rally in the Treasury and mortgage-backed securities markets.



The mood of mortgage investors is changing as they sweat out their recent security purchases made at, or very near all-time historically high prices. From this point forward economic news that proves to be "less-bad" than expected will likely produce a much stronger move by investors to push prices down and note rates higher as they scramble to avoid the financial pain that will be inflicted on those caught holding a portfolio of low note-rate mortgages should the macro-economic news show potential improvement.



The slightly elevated August Retail Sales figures expected from the Commerce Department at 8:30 a.m. ET tomorrow have already been priced into the mortgage market. The modest improvement in the ex. auto component of this report was likely driven almost exclusively by back-to-school discounts from businesses and the impact of tax-free holidays in seventeen states designed to support retail sales.


Mortgage investors will probably view this data as too distorted to provide a real sense of the current level of domestic consumerism. If so, this report will not likely influence the direction of mortgage interest rates one way or the other tomorrow. In the unlikely event the August Retail Sales figures exceed the consensus estimate -- look for investors to respond by pushing prices lower and note rates higher before the end of Tuesday's trading session.

Friday, September 10, 2010

Credit markets are suffering a bad case of indigestion this morning after investors were called on to gobble up $67 billion of government debt together with a record setting supply of corporate debt issues.



The selling pressure we are experiencing today appears to be driven by two general influences; (1) the temporary consequences of short-term technical factors rather than a major shift in investors' view of the broad economy, and (2) the impact of a number of traders taking the past two days off to celebrate the Jewish New Year with their families.



Buyers, particularly money managers and foreign central banks appear to be nibbling a little after prices of both Treasury debt obligations and agency eligible mortgage-backed securities have fallen for two consecutive days. The demand from these buyers so far this morning has only been sufficient to drive prices off of their intraday lows -- but still remains too soft to do much else.



Where we go from here will depend in part on next week's run of macro-economic data. Should Monday's July Retail Sales figures together with in inflation story contained in Thursday's July Producer Price Index and Friday's July Consumer Price Index exceed current expectations -- it will likely be difficult if not impossible for mortgage interest rates to move lower from current levels.

Thursday, September 9, 2010

The Labor Department announced this morning that the number of Americans standing in line to file first time claims for unemployment benefits dropped by an unexpected 27,000 during the week ended September 4th. Last week's apparent improvement in the story from the labor sector sent mortgage investors racing to drop prices and nudge up note rates as a few rays of light filter though the darkness of their recessionary thinking.



As they say, the devil is in the detail - and in this case more than a few investors may choose to rethink their earlier decision to sell mortgage-backed securities aggressively this morning after they take the time to read the initial jobless claims report more closely.



It is worth noting that the Labor Department was quick to point out because of the Labor Day Holiday, nine states - including California - failed to file their jobless claims reports by the Labor Department's deadline - so government data wonks simply plugged in guesstimates for those non-reporting states. Once those states actually get around to filing their jobless numbers with the department - the jobless claims revisions over the next two weeks could be larger than normal.



Even assuming no revisions, 451,000 initial claims last week falls far short of indicating a recovery has begun in the labor market. Until/unless the total number of workers filing first-time unemployment claims drops below 400,000 on a multiple-week basis will it be reasonable to suggest the employment picture has brighten notably.



As it currently stands nearly 10 million people are drawing some form of unemployment benefit from the government - and several million more have exhausted their claims and now have no benefits at all. The "so what" factor here is dramatic - were the country gripped by a major recession and simply operating at what might be described as normal conditions - 2 million to 4 million people would be expected to be drawing unemployment insurance benefits. It is painfully obvious we still have a long way to go before the worst job market conditions since the Great Depression show notable signs of improvement.



Today's 30-year bond sale is the last of Uncle Sam's three debt auctions on tap this week. In light of this morning's better-than-expected news from the labor sector some market participants are concerned demand may not be strong enough to avoid the necessity of Uncle Sam "sweetening the pot" by accepting lower prices for these securities to attract the required capital.


There are some rather glaring reasons to believe these concerns are probably misplaced - at least this time around. Should today's auction be more aggressively bid than most observers now anticipate - the chance for a little "relief" rally this afternoon in the mortgage market will improve dramatically.

Mortgage investors are standing around with their hands in their pockets this morning while they await the result of the Treasury Department's $21 billion 10-year note auction.
Today's 10-year note sale is the second of three auctions on tap this week. Some market participants are concerned demand may not be strong enough to avoid the necessity of Uncle Sam "sweetening the pot" by accepting lower prices for these securities to attract the required capital. Those concerns are probably misplaced - at least this time around.



The potential for a return of the sovereign European debt crisis to front page news is likely sufficient to drive significant amounts of international investors into the relative safe-haven of today's 10-year note offering. If so, this event will likely have little direct influence on the trend trajectory of mortgage interest rates. Should today's auction be more aggressively bid that most observers now anticipate - the chance for a little "relief" rally this afternoon in the mortgage market will improve dramatically. I am not necessarily expecting any developing rally in the mortgage market today to recover all of the slump we've experienced so far this morning (Fannie Mae 4.0% 30-year down 9/32nds as I write) but it might come close to cutting the price loss so far today in half. The 10-year note auction will conclude at 1:00 p.m. ET.



As they do every Wednesday, the Mortgage Bankers of America have release their mortgage loan application index for the week ended September 3rd. According to the MBA the overall number of mortgage applications drooped 1.5% -- with refinance requests slumping 3.1% while the purchase loan demand improved by 6.3%, marking the largest gain for this component of the overall index in more than three months. Refinance requests once again accounted for four out of every five loan applications for the week.

WEEK OF SEPTEMBER 6 - 10, 2010

Analysts, economist and other market participants will spend a large part of this holiday shortened week hotly debating whether mortgage interest rates established their long-term lows on the last day of August – or whether the mortgage market simply succumbed to a round of pre-holiday profit-taking that will soon fade -- and allow mortgage rates to move to fresh new all-time record lows.


Many mortgage investors remain generally unconvinced mortgage interest rates are destined for a strong move to higher levels -- only because there is nothing in the way of conclusive data to suggest the economy is shifting gears into a higher pace of overall growth. As you can plainly see below, there is nothing on this week’s economic calendar that will do much to clarify whether or not the economic porridge has become too warm to support lower mortgage rates. Until more meaningful economic data becomes available it is highly likely mortgage investors will look to trading activity in stock markets as a guide to determine interest rate levels.


From a technical perspective it appears the aggressive short-term rally in the Dow that began on Tuesday, August 31st will likely run out of momentum on or about Wednesday, September 8th somewhere in a price range between 10500 and 10550. If this assessment proves accurate, the sell-off in the stock that will follow will likely prove supportive of the short-term prospects for steady to perhaps fractionally lower mortgage interest rates. Play it by the numbers.

Now - to this week's activity in the market:


Mon. Sept. 6 The mortgage market is closed for the Labor Day Holiday


Tues. Sept. 7, 1:00 p.m. ET
Treasury sells $34 billion of 3-year notes The relatively short duration of these notes should draw strong participation levels from domestic as well as foreign investors. If so, this event will likely prove to be supportive of steady to perhaps fractionally lower mortgage interest rates.


Wed, Sept. 8, 1:00 p.m. ET
Treasury sells $24 billion of 10-year notes This auction will likely draw decent demand from buyers as technical indicators are flashing an increasing number of signs that a short-term price bottom may be near. If my assessment proves accurate, this event will tend to be supportive of steady to perhaps fractionally lower mortgage rates.


Wed. Sept. 8, 2:00 p.m. ET
Fed releases Beige Book This report, named for the color of its cover, is a compilation of economic data from all 12 Federal Reserve districts. The tone of these collected assessments will likely be more pessimistic than in prior periods as a noticeable slowdown in manufacturing activity grips large parts of the country. The chance any of the data in this report will surprise investors is small. Look for this data to be essentially "toothless" with respect to its impact on the trend trajectory of mortgage interest rates.


Thurs. Sept. 9, 8:30 a.m. ET
Initial jobless claims for the week ended 9/4 Down 2,000 to 470,000 Until the total number of initial jobless claims falls below 400,000 on a week-over-week basis -- this data will tend to support steady mortgage interest rates.

Thurs. Sept. 9, 1:00 p.m. ET
Treasury sells $16 billion of 30-year bonds The yield of this security has risen to a level (3.792%) that will likely draw strong demand from both domestic and global investors. If so, this event will tend to be supportive of the prospects for steady to perhaps fractionally lower mortgage interest rates.


Fri. Sept. 10, 10:00 a.m. ET
July Wholesale Inventories +0.4% vs. last +0.1% This old stale bit of macro-economic news will likely do nothing more than take up space on this week’s calendar.

Fri. Sept. 10
Before the close Most 30-year mortgage-backed securities "roll" to Oct. delivery This is nothing more than a standard monthly administrative function of the mortgage-backed securities market. The roughly 31.25 basis-point price reduction associated with this event in the mortgage-backed security market has already been factored into most of your investors’ rate sheets.

Tuesday, September 7, 2010

Judging by the early trading action in the mortgage market this morning -- investors seem to be indicating they where perhaps a little too aggressive with their response to last Friday's better-than-expected news from the labor sector. The August nonfarm payroll was certainly not as bad as many had anticipated - but it certainly was not good enough to suggest a period of robust job growth is just around the corner.


Renewed concerns regarding the potential redevelopment of a sovereign debt crisis in Europe together with a change in investors' thinking regarding the domestic economy has created a "flight-to-quality" buying spree that is packing enough financial firepower to be supportive of steady to fractionally lower mortgage interest rates today.


This afternoon's $34 billion 3-year note sale to be conducted by the Treasury Department should draw solid demand given the current market environment - rendering the event essentially "toothless" with respect to its potential impact on the trend trajectory of mortgage interest rates.

Friday, September 3, 2010

As you are probably aware by now, the Labor Department reported this morning that the economy lost fewer jobs in August than most economists had been expecting. The government said overall employment fell by 54,000 jobs last month while the nation's jobless rate edged up to 9.6% from the 9.5% month earlier mark.


In addition, the data wonks at the Labor Department revised the June and July figures to show 123,000 fewer jobs were lost than previously reported. The detail of the report showed that the private sector continues to create less than 100,000 new jobs a month - a pace far too weak to absorb the millions of workers who have lost their jobs in the worst recession since the 1930's.


Even so, mortgage investors had priced in much darker news from the labor sector than the actual data revealed - creating the rather sharp sell-off in this morning's mortgage market.



Looking ahead to next week the holiday shortened calendar is completely void of anything but second tier economic data - but that doesn't mean it will be a completely boring trading period. Uncle Sam will be conducting a three-part auction from Tuesday through Thursday. He'll be selling 3- and 10-year notes together with a bundle of 30-year bonds. The 10-year note and 30-year bond auctions may require Uncle Sam to "sweeten-the-pot" a little bit to attract the required capital. If so "pot sweetening" process will likely put some slight upward pressure on mortgage interest rates.

Thursday, 90210

The stage is set - and the waiting has begun.


The mortgage market has had a terrific rally over the past month or so - with the contract rate for 30-year fixed-rate mortgages moving to a new all-time low of 4.36%. While historically low mortgage interest rates are good news for borrowers and mortgage originators - it is nervous news for mortgage investors since the price of the underlying mortgage-backed securities these investors are currently buying has just touched an all-time record high.



The growing for these buyers of mortgage-backed securities is that they will be caught holding the bag should the great rally in the mortgage market come to a sudden and screeching halt. In order for current buyers of mortgage securities to make a profit on their just completed transactions - by necessity they will have to find a ready, willing and able party eager to pay an even greater price for the same security.


If this "greater fool" is nowhere to be found - current mortgage investors will quickly realize they have made a major financial blunder -- and will immediately begin scrambling to unload their mortgage assets as quickly as possible to minimize the financial pain. The more selling pressure this activity creates -- the more desperate sellers will become and the harder it will be to find buyers - a scenario, should it develop, marked by surging note rates and plummeting rate sheet prices = higher rates!



Mortgage investors will be keenly attuned to tomorrow morning's August nonfarm payroll data. If the headline payroll number matches or exceeds the consensus estimate for a loss of 100,000 jobs -- and/or the national jobless rate creeps up 9.6% or higher -- mortgage investors will breathe a sigh of relief as mortgage interest rates trade steady to fractionally lower.


Should the August nonfarm payroll report indicate 75,000 or fewer jobs were lost during the month -- and/or should the national jobless rate post a reading of 9.5% or lower -- the race for the market exists will be on - with mortgage interest rates moving higher and prices slumping sharply lower. This latter scenario carries a lower probability of actually occurring - though not so low that it can be discounted completely. Be ready.


AND historically a Friday going into a three day holiday weekend spells higher rates!!

Wednesday, SEPTEMBER 1, 2010

The Institute of Supply Management's Manufacturing Index showed surprising strength last month. This measure of activity at the nation's factories rose from a reading of 55.5 in July to 56.3 for August. The modest gain bucked investors' expectations for a gain in the very low 50's.


The data suggests conditions in the manufacturing sector held up much better than anticipated last month. The manufacturing sector has now expanded for 13 straight months -- though the pace of growth has slowed noticeably during the last quarter. The ISM August data is at odds with recent regional reports from the Federal Reserve showing a far more notable slowdown in the manufacturing sector.


It appears investors decided the mixed message with respect to activity levels at the nation's factories warrants the use of a "better-safe-than-sorry" pipeline risk management strategy this morning - an event that has created the move to lower rate sheet prices in today's early going.


Recent record low 30-year mortgage interest rates have served to nudge the Mortgage Bankers of America's weekly composite mortgage application index up a very modest 2.7%. The survey for the week showed all mortgage applications edged 2.7% higher on a week-over-week basis. The refinance index climbed 2.8% while the purchase index showed a gain of a more modest 1.8% for the week. Refinance applications accounted for about 83% of all applications and more than 80% of the prospective loan volume.

Tuesday, August 31, 2010

The mortgage market is simply treading water today as investors await Friday's August nonfarm payroll report.


This morning's August consumer confidence report showed a modest improvement over the five-month low set last month and drew little more than a passing glance from market participants. The modest rise in consumer's attitudes was really nothing to get excited about since it amounted to nothing more than a very small upswing from a very dismal month earlier level.


Investors fretting over the pace of the economic recovery will be closely attuned to any tidbit of insight that may be available in the minutes of the Federal Open Market Committee's August 10th meeting (scheduled for release at 2:00 p.m. today). Though the document will be picked apart on word-by-word basis, investors are unlikely to find anything that will provide them with an improved perspective on the state of the economy or an indication of a meaningful shift in the Fed's current monetary policy strategy.

Monday, August 30, 2010

The Commerce Department reported this morning that income and spending grew slightly in July while inflation pressures at the consumer level were benign.


Personal incomes grew by 0.2% last month while spending rose by 0.4%. The Fed's preferred measure of consumer price inflation, the personal consumption expenditure index, a separate component of the income and spending report, rose 0.1% in July and was up a meager 1.4% on a year-over-year basis. With personal savings continuing to hover near 6.0%, it is clear consumers are focusing on getting their finances in order rather than aggressively increasing their spending. Rising personal savings suggests to many analysts the engine that drives more than 70% of our domestic economic activity is likely to perform below its potential for months yet to come.



Against such an economic backdrop stocks will likely continue to slump as capital flows from riskier asset classes into the safest investment vehicles available. The good news here is that for the time-being, dollar denominated assets like Treasury obligations and mortgage-backed securities are about the-only-game-in-town that perfectly fits the "safe haven" requirement for both domestic and global investors. As long as this condition prevails it will tend to support the prospects for steady to perhaps fractionally lower mortgage interest rates.

Friday, August 27, 2010

The mortgage market is being pounded by profit-taking this morning as investors react to news indicating overall economic growth in the second-quarter was not as weak as many had anticipated. Comments from Fed Chairman Bernanke indicating the Fed is prepared to take additional action if need be to restart the nation's economic engines simply added a little fuel to the fire.


The current mindset among mortgage investors toward today's revised second-quarter Gross Domestic Product appears to revolve around the idea that while the component numbers weren't particularly good - they were at least better than most had expected. Real GDP increased at an annualized rate of 1.6% in the second quarter - revised down from first estimates for growth of 2.4% -- but ahead of the consensus forecast calling for a headline GDP number of 1.4%.


The stir the revised second-quarter GDP numbers are creating in the mortgage market will probably fade pretty quickly as calmer, cooler heads point out that until labor market weakness shows signs of improving; overall economic growth will remain desperately anemic. But that is a story for another day.


Looking ahead to next week every scheduled report - from Monday's July Personal Income and Spending data through the late-week release of the Institute of Supply Management's Manufacturing and Service Sector Index values will take a backseat to the August Nonfarm Payroll figures scheduled to hit the newswires Friday morning at 8:30 a.m. ET.


Mortgage investors have already priced in expectations for a headline nonfarm payroll decline of 100,000 - a number likely sufficient to nudge the nation's unemployment rate up to 9.6%. Numbers that match or fall below the consensus estimate for these two major components of the August jobs report will tend to support steady to perhaps fractionally higher mortgage interest rates. Should one or both components exceed the consensus estimate -- look for mortgage investors to respond by pressing note rates a bit lower.