Thursday, February 25, 2010

The mortgage market got a friendly boost to slightly higher prices this morning from a mixed-bag of economic news and a resurgence of fears about possible sovereign credit defaults in the euro-zone that is once again producing some "flight-to-quality" buying of dollar denominated assets like Treasury debt obligations and mortgage-backed securities.



The government said new orders for long-lasting manufactured goods rose a stronger than expected 3.0% in January -- driven exclusively by a major increase in new orders for commercial aircraft. Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending, fell 2.9% in January. The message buried in all this statistical mumbo-jumbo is actually very straightforward - the pace of economic recovery is currently loosing momentum.



The initial claims data for the week ended February 20th reinforced the message contained in the durable goods order data. The number of workers standing in line to collect first-time unemployment benefits rose by a surprising 22,000 claimants last week. There is justification to the argument currently being made by some analysts that the latest rise in the weekly jobless claims figures was at least partially due to processing the backlog of applications accumulated during the recent snowstorms through the Northeast. The bottom line is that this data series is being temporarily distorted by a degree of noneconomic factors. If initial claims do not begin to turn lower before mid-March - investors will likely increasingly view weak initial jobless claims data as signaling the economy is beginning to tumbling back into a recession.



In the strange world of the credit markets and mortgage interest rates - slumping economic activity reduces the overall demand for capital which in turn tends to reduce interest rates in general and mortgage rates in particular. If this condition were to develop the goods news is that mortgage interest rates would almost certainly move lower - the bad news is that the pool of eligible borrowers begins to shrink as the ravages of job destruction takes its toll on the workforce.



Uncle Sam will conduct the last of his four-part borrowing spree this week when he sells $32 billion of 7-year notes. The auction will conclude at 1:00 p.m. ET. Solid demand at today's Treasury note sale will tend to support steady to lower mortgage interest rates while a poorly bid sale will almost surely push mortgage interest rates higher.