Monday, January 4, 2010

HAPPY NEW YEAR!!

Mortgage investors will likely spend the majority of the week jockeying for position in front of Friday's much anticipated December Nonfarm Payroll report. Today's slightly higher than expected activity levels in the manufacturing sector as measured by the Institute of Supply Management is really little more than a side show.

Traders seem to be almost equally divided with respect to their views of what Friday's job report will reveal.

One group of traders believes for the first time in two years, the economy may have experienced a month in which more jobs were created than were destroyed. If Friday's December employment report shows positive growth in headline payrolls it will provide a powerful jolt to what has otherwise been a very sluggish recovery - and that's a condition almost certain to put notable upward pressure on mortgage interest rates.

The opposing group of traders look for businesses to take their sweet time resuming hiring, if for not other reason than the uncertainty surrounding the impact of heath care, taxation and regulation issues still being debated in Congress. Even if businesses are ready to rehire sooner, this group of traders believe fixing the labor market will not be a quick process. Since the start of the recession (estimated as late 2006 early 2007 -- depending on which economist you happen to talk to) about 7.9 million jobs have been lost. To put that number in perspective, there were 2.5 million jobs created in 2005, which was at the peak of the housing boom and a year in which the economy grew at a healthy 3.1% pace. Few economists expect that level of sustained economic growth over the next few years - and even if economic growth accelerated at that rate - it would take at least three years to recoup the lost jobs.

The sharp rise in mortgage interest rates over the last two-weeks of the year was largely created by conservative risk managers choosing to take a "safe-rather-than-sorry" approach to Friday's first major economic report of the new year -- by pricing-in expectations for the first increase in payroll growth since December 2007. Should this outlook prove too optimistic -- with December payrolls posting a loss of 20,000 or more -- a fairly large number of market participants will get caught leaning in the wrong direction - probably resulting in a relatively short-lived but nonetheless welcomed move to fractionally lower mortgage interest rates and higher prices.