Monday, March 1, 2010

Action in the mortgage market will likely be tightly range bound in advance of Friday's February payroll report. It's likely going to be difficult for mortgage interest rates to move significantly higher until we see a sustained improvement in job creation - and that's an outcome not expected for several months yet.


In addition, the Federal Reserve's pledge to keep its short-term benchmark interest rates low and the constantly changing headlines surrounding the debt crisis in Greece should keep global capital flowing steadily into the relative safe-haven of dollar denominated assets like Treasury obligation and mortgage-backed securities for at least the majority of the week.



Earlier this morning the Commerce Department reported consumer spending rose 0.5% in January even though incomes grew at a much more modest 0.1%. Mortgage investors were quick to shrug-off the uptick in spending since the numbers make it evident that consumers are dipping into savings for the money to make their purchases because income growth remains so weak. Without sustained improvement in personal incomes - the pace of spending on Main Street will fall sharply in coming months as consumers quickly burn through their limited savings.


The core personal consumption expenditure index component of this report showed that the Fed's preferred measure of inflation at the consumer level was unchanged in January and was up a very modest 1.4% from year earlier levels - a positive sign for the prospects of steady to perhaps fractionally lower mortgage interest rates ahead.



In a separate report the private Institute of Supply Management said its index of national factory activity declined to a reading of 56.5% in February from 58.4% in January. Readings over 50% indicate more firms said business was improving than said it was worsening. The employment index component of this report rose to 56.1% from 53.3%, its third month above 50.0%, an indication that more companies are adding workers than shedding them.


Analysts were quick to note the gap between new orders and inventories -- a good proxy for future production --is narrowing, which suggests that factory output will moderate over the next few months. With inventories no longer falling rapidly, production should grow more in line with final demand - and growth in final demand will require noticeable improvement in the employment picture. Most mortgage investors gave this data little more than a passing glance.



The consensus forecast among economists calls for a drop of 50,000 jobs for Friday's headline nonfarm payroll figure and an uptick in the national unemployment rate to 9.8% from January's 9.7% mark. If the consensus forecast proves accurate, this data will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates. In the highly unlikely event the February nonfarm payroll data shows a loss of 10,000 or fewer jobs and/or the national jobless rate posts a reading of 9.7% or lower -- look for mortgage investors to push mortgage interest rates higher from current levels.