Thursday, February 18, 2010

The mortgage market got off to a weak start this morning as stronger that expected inflation news from the producer sector trumped weaker than expected news from the labor sector.
The headline producer price index posted a gain of 1.4% last month - double the consensus forecast of most economists for a gain of 0.7%.


The lion's share of the big jump in the headline number is attributable to a 5.1% surge in energy prices as gasoline and heating oil prices rose. The more important core rate of the producer price index, a value that excludes the more volatile food and energy components, posted a surprising strong gain of 0.3% compared with no change in December. One month does not a tend make. The probabilities are high that calmer cooler heads will soon come to realize that the firming of prices at the producer price level will be sharply constrained as final demand remains soft due to exceptionally high unemployment rates.



In a separate report the Labor Department announced the number of workers filing first-time jobless benefits rose by a surprising 31,000 during the week ended February 13th. Most mortgage investors appear to have completely discounted this otherwise mortgage market friendly news -- reasoning that a combination of factors were likely at play during the period. Snow storms may not have limited the ability of a large number of those newly unemployed to reach the government offices to file their claims as had been expected - and there may also have been more fallout from the temporary shutdown of Toyota's production lines than was originally projected. In any case, the majority of mortgage investors shrugged this report off.



Most of the selling pressure in the mortgage market this morning has probably been created by the Treasury Department's announcement that they intend to sell a total of $126 billion of government debt obligations in a four-part auction starting next week Monday. The incoming supply is more than many market participants had anticipated to see - so the scramble is now on to sell existing assets from portfolios to make room for this new supply.