Protests to the end the 30-year rule of Egyptian President Mubarak continued over the weekend. Egypt's importance to the global economy is relatively small, but its importance to the transportation of oil from other parts of the Middle East is huge.
While investors appear to be attentive to the ever changing dimensions of this event - there is currently no panic. If the Egyptian crisis were to spread to other countries in the region -- or if the flow of oil through the Suez Canal were to be impeded -- things could change in a blink-of-an-eye.
Unsure how much the safe-haven appeal of dollar denominated assets like Treasury obligations and mortgage-backed securities would be overshadowed by the rising inflation pressures created by the almost certain massive surge in energy prices should civil war breakout in the region. Hope is that such a scenario proves to be nothing more than a fleeting "what if" question. If such an event were to actually manifest itself, suspect investors would opt for cash and near-cash (Treasury obligations of 1-year or less) rather than expose their capital to longer-term investments and the attendant financially corrosive power of rising inflation. That's not a story that would be supportive of the prospects for steady to perhaps fractionally lower mortgage interest rates longer-term.
Mortgage investors shrugged-off this morning's report from the Commerce Department indicating consumer spending rose by 0.7% last month. The details of the December personal income and spending report showed that much of the surge in consumer spending came from a notable drawdown in household savings accounts as personal incomes grew a very modest 0.4% during the period. In addition, the renewal of special and extended government unemployment insurance benefits last month put money in the hands of consumers likely to spend it. So while some "talking heads" are harping about the big surge in consumer spending -- most mortgage investors largely discounted the whole thing - especially since the personal consumption expenditure index component of the report, the Fed's preferred measure of inflation at the consumer level, was unchanged in December after edging up 0.1% in November.
Yet to come this week -- Tuesday and Thursday will be dominated by the Institute of Supply Management's reports of activity in the manufacturing and service sectors of the economy to be followed by the release of the January nonfarm payroll figures on Friday morning. The reports scattered through the earlier part of the week are expected to be generally mortgage market neutral and will therefore be overshadowed by the jobs number on Friday. Most analysts anticipate the economy created 150,000 more jobs in January than were lost while the national jobless rate is expected to tick up to 9.5% from December's 9.4%. Numbers that match or fall below these projections will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates. In the unlikely case the actual numbers are stronger than currently projected look for your investors to push mortgage rates higher.
Monday, January 31, 2011
Friday, January 28, 2011
The mortgage market stumbled out of the gates a little bit this morning as investors reacted to the first estimate of the economy's overall growth rate during the last three months of 2010.
The headline Q4 Gross Domestic Product number posted a gain of 3.2% -- slightly below most economists' expectations for a reading of 3.5%. The devil was in the details - especially the detail that showed consumer spending had its biggest gain in four years.
Less experienced traders were quick to latch onto this seemingly super-strong measure of economic growth and they aggressively pushed mortgage interest rates higher in the day's early trading. After letting them have their fun for a little while -- more experienced traders moved in with their substantial financial firepower and turned the trading activity in the mortgage market completely around.
Numbers can be deceiving - especially if one fails to consider the broader view. More experienced traders were already watchfully aware that much of the driving force behind the surge in consumer spending last year resulted from heavy price discounting by retailers. The national consumer income numbers show households chose to dip into their savings to buy the offered goods and services at their "blue light" and "one-time only" special price.
The fourth quarter employment cost index (released earlier this morning as well) showed wage and salary growth eked upward by a mere 0.4%. Extremely high joblessness, along with dim prospects for wage growth, will by necessity cause households to hold spending in check as we move into 2011.
More experienced traders are aware that the improvement in the economy that all the media "talking heads" are so breathlessly reporting this morning was not driven by real growth from the consumer - but rather by all the fiscal and monetary stimulus provided by the government in the form of more than $2 trillion dollars of direct debt purchases by the Fed -- and the dynamics of multiple tax cuts present and future. Once the government contribution is removed from the equation -- economic growth will not likely be nearly as robust as it now appears. That is probably bad news in terms of any notable acceleration in mortgage loan demand through at least mid-year -- but good news in terms of the prospects for steady to fractionally lower mortgage interest rates.
Next week will be a busy week in terms of economic data to be released. Mortgage investors will get a look at the pace of inflation at the consumer level contained in Monday's December Personal Income and Spending report. Tuesday and Thursday will be dominated by the Institute of Supply Management's reports of activity in the manufacturing and service sectors of the economy. The week will round-out with the release of the January nonfarm payroll figures on Friday morning. The reports scattered through the earlier part of the week are expected to be generally mortgage market neutral and will therefore be overshadowed by the jobs number on Friday.
Most analysts anticipate the economy created 150,000 more jobs in January than were lost while the national jobless rate is expected to tick up to 9.5% from December's 9.4%. Numbers that match or fall below these projections will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates. In the unlikely case the actual numbers are stronger than currently projected look for your investors to push mortgage rates higher.
The headline Q4 Gross Domestic Product number posted a gain of 3.2% -- slightly below most economists' expectations for a reading of 3.5%. The devil was in the details - especially the detail that showed consumer spending had its biggest gain in four years.
Less experienced traders were quick to latch onto this seemingly super-strong measure of economic growth and they aggressively pushed mortgage interest rates higher in the day's early trading. After letting them have their fun for a little while -- more experienced traders moved in with their substantial financial firepower and turned the trading activity in the mortgage market completely around.
Numbers can be deceiving - especially if one fails to consider the broader view. More experienced traders were already watchfully aware that much of the driving force behind the surge in consumer spending last year resulted from heavy price discounting by retailers. The national consumer income numbers show households chose to dip into their savings to buy the offered goods and services at their "blue light" and "one-time only" special price.
The fourth quarter employment cost index (released earlier this morning as well) showed wage and salary growth eked upward by a mere 0.4%. Extremely high joblessness, along with dim prospects for wage growth, will by necessity cause households to hold spending in check as we move into 2011.
More experienced traders are aware that the improvement in the economy that all the media "talking heads" are so breathlessly reporting this morning was not driven by real growth from the consumer - but rather by all the fiscal and monetary stimulus provided by the government in the form of more than $2 trillion dollars of direct debt purchases by the Fed -- and the dynamics of multiple tax cuts present and future. Once the government contribution is removed from the equation -- economic growth will not likely be nearly as robust as it now appears. That is probably bad news in terms of any notable acceleration in mortgage loan demand through at least mid-year -- but good news in terms of the prospects for steady to fractionally lower mortgage interest rates.
Next week will be a busy week in terms of economic data to be released. Mortgage investors will get a look at the pace of inflation at the consumer level contained in Monday's December Personal Income and Spending report. Tuesday and Thursday will be dominated by the Institute of Supply Management's reports of activity in the manufacturing and service sectors of the economy. The week will round-out with the release of the January nonfarm payroll figures on Friday morning. The reports scattered through the earlier part of the week are expected to be generally mortgage market neutral and will therefore be overshadowed by the jobs number on Friday.
Most analysts anticipate the economy created 150,000 more jobs in January than were lost while the national jobless rate is expected to tick up to 9.5% from December's 9.4%. Numbers that match or fall below these projections will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates. In the unlikely case the actual numbers are stronger than currently projected look for your investors to push mortgage rates higher.
Thursday, January 27, 2011
The Treasury Department will sell $29 billion of 7-year notes at 1:00 p.m. ET today.
There is a chance this sale will be the strongest of three-offerings the Treasury Department put on the auction-block this week (compared to Tuesday's 2-year notes and yesterday's 5-year notes).
Portfolio managers who align their investment funds with benchmark indexes often have to make last-minute adjustments to the average maturity of their holdings at the end of each month. Seven-year notes are always the last Treasury notes sold at the end of the month, so they work as a quick fix for managers who need to do a little tweaking to their positions.
The Fed is also expected to be a buyer at today's auction - spending $5 to $10 billion of the roughly $300 billion they have left of their original "QE2" checking account balance ($600 billion in case you don't recall).
A well bid 7-year note auction would likely prove very supportive for the prospects of steady to perhaps fractionally lower mortgage interest - at least between today and the release of next week Friday's January nonfarm payroll figures.
In other news of the day, the Labor Department reported the number of Americans filing first-time claims for unemployment benefits rose by a surprising 51,000 during the week ended January 22nd. Mortgage investors largely shrugged this outsized gain off - reasoning that harsh weather conditions in some parts of the country kept workers at home and caused a backlog in the processing of claims from prior weeks. The latest jump in the initial weekly jobless claims number does not have any implications for next week's larger and more important nonfarm payroll report -- as this week's initial jobless claims data fell outside the more meaningful report's survey period.
There is a chance this sale will be the strongest of three-offerings the Treasury Department put on the auction-block this week (compared to Tuesday's 2-year notes and yesterday's 5-year notes).
Portfolio managers who align their investment funds with benchmark indexes often have to make last-minute adjustments to the average maturity of their holdings at the end of each month. Seven-year notes are always the last Treasury notes sold at the end of the month, so they work as a quick fix for managers who need to do a little tweaking to their positions.
The Fed is also expected to be a buyer at today's auction - spending $5 to $10 billion of the roughly $300 billion they have left of their original "QE2" checking account balance ($600 billion in case you don't recall).
A well bid 7-year note auction would likely prove very supportive for the prospects of steady to perhaps fractionally lower mortgage interest - at least between today and the release of next week Friday's January nonfarm payroll figures.
In other news of the day, the Labor Department reported the number of Americans filing first-time claims for unemployment benefits rose by a surprising 51,000 during the week ended January 22nd. Mortgage investors largely shrugged this outsized gain off - reasoning that harsh weather conditions in some parts of the country kept workers at home and caused a backlog in the processing of claims from prior weeks. The latest jump in the initial weekly jobless claims number does not have any implications for next week's larger and more important nonfarm payroll report -- as this week's initial jobless claims data fell outside the more meaningful report's survey period.
The Treasury Department will sell $29 billion of 7-year notes at 1:00 p.m. ET today.
There is a chance this sale will be the strongest of three-offerings the Treasury Department put on the auction-block this week (compared to Tuesday's 2-year notes and yesterday's 5-year notes).
Portfolio managers who align their investment funds with benchmark indexes often have to make last-minute adjustments to the average maturity of their holdings at the end of each month. Seven-year notes are always the last Treasury notes sold at the end of the month, so they work as a quick fix for managers who need to do a little tweaking to their positions.
The Fed is also expected to be a buyer at today's auction - spending $5 to $10 billion of the roughly $300 billion they have left of their original "QE2" checking account balance ($600 billion in case you don't recall).
A well bid 7-year note auction would likely prove very supportive for the prospects of steady to perhaps fractionally lower mortgage interest - at least between today and the release of next week Friday's January nonfarm payroll figures.
In other news of the day, the Labor Department reported the number of Americans filing first-time claims for unemployment benefits rose by a surprising 51,000 during the week ended January 22nd. Mortgage investors largely shrugged this outsized gain off - reasoning that harsh weather conditions in some parts of the country kept workers at home and caused a backlog in the processing of claims from prior weeks. The latest jump in the initial weekly jobless claims number does not have any implications for next week's larger and more important nonfarm payroll report -- as this week's initial jobless claims data fell outside the more meaningful report's survey period.
There is a chance this sale will be the strongest of three-offerings the Treasury Department put on the auction-block this week (compared to Tuesday's 2-year notes and yesterday's 5-year notes).
Portfolio managers who align their investment funds with benchmark indexes often have to make last-minute adjustments to the average maturity of their holdings at the end of each month. Seven-year notes are always the last Treasury notes sold at the end of the month, so they work as a quick fix for managers who need to do a little tweaking to their positions.
The Fed is also expected to be a buyer at today's auction - spending $5 to $10 billion of the roughly $300 billion they have left of their original "QE2" checking account balance ($600 billion in case you don't recall).
A well bid 7-year note auction would likely prove very supportive for the prospects of steady to perhaps fractionally lower mortgage interest - at least between today and the release of next week Friday's January nonfarm payroll figures.
In other news of the day, the Labor Department reported the number of Americans filing first-time claims for unemployment benefits rose by a surprising 51,000 during the week ended January 22nd. Mortgage investors largely shrugged this outsized gain off - reasoning that harsh weather conditions in some parts of the country kept workers at home and caused a backlog in the processing of claims from prior weeks. The latest jump in the initial weekly jobless claims number does not have any implications for next week's larger and more important nonfarm payroll report -- as this week's initial jobless claims data fell outside the more meaningful report's survey period.
Wednesday, January 26, 2011
The Treasury Department will sell $35 billion of 5-year notes at 1:00 p.m. ET today. It will be their second of three auctions scheduled for the week.
A little more than an hour later at 2:15 p.m. ET the Federal Open Market Committee will end its two-day January meeting and release a statement on the economy and monetary policy.
The timing of the release of the Fed's post meeting statement may dampen demand for the 5-year notes. If so, it will be difficult if not impossible for mortgage interest rates to make much headway toward lower levels. In order to be supportive of the prospects for lower mortgage interest rates -- the Fed's post-meeting statement will need to sound cautious in terms of both the sustainability of recent indications of accelerating economic activity and the improving labor market story.
If the Fed leans too far in the direction of seeing the economic glass as half-empty, they will appear out-of-touch with reality and their creditability with credit market participants will slip (yet lower). On the other hand, if the Fed presents a more upbeat view of the economy and job creation together with a view that core inflation pressures will likely begin to tick higher -- mortgage investors will almost certainly feel compelled to push rates higher. The Fed's wordsmiths have their job cut out for them. If they fail today's "finesse-test" - you can bet the impact on your rate sheets won't be pretty.
The Mortgage Bankers of America have released the details of the Mortgage Application Survey for the week ended January 21st. Overall application activity dropped 12.9% on a week-over-week basis. Refinance requests declined by 15.3% while loan request for purchase money was down 8.7%. The average contract rate for 30-year fixed rate mortgages finished down 4.8%, up by 3 basis points from the prior week, down by 13 basis points from four weeks ago, and down by 22 basis points from the year ago level. According to the MBA seven out of every ten loan applications taken last week were for mortgage refinance.
A little more than an hour later at 2:15 p.m. ET the Federal Open Market Committee will end its two-day January meeting and release a statement on the economy and monetary policy.
The timing of the release of the Fed's post meeting statement may dampen demand for the 5-year notes. If so, it will be difficult if not impossible for mortgage interest rates to make much headway toward lower levels. In order to be supportive of the prospects for lower mortgage interest rates -- the Fed's post-meeting statement will need to sound cautious in terms of both the sustainability of recent indications of accelerating economic activity and the improving labor market story.
If the Fed leans too far in the direction of seeing the economic glass as half-empty, they will appear out-of-touch with reality and their creditability with credit market participants will slip (yet lower). On the other hand, if the Fed presents a more upbeat view of the economy and job creation together with a view that core inflation pressures will likely begin to tick higher -- mortgage investors will almost certainly feel compelled to push rates higher. The Fed's wordsmiths have their job cut out for them. If they fail today's "finesse-test" - you can bet the impact on your rate sheets won't be pretty.
The Mortgage Bankers of America have released the details of the Mortgage Application Survey for the week ended January 21st. Overall application activity dropped 12.9% on a week-over-week basis. Refinance requests declined by 15.3% while loan request for purchase money was down 8.7%. The average contract rate for 30-year fixed rate mortgages finished down 4.8%, up by 3 basis points from the prior week, down by 13 basis points from four weeks ago, and down by 22 basis points from the year ago level. According to the MBA seven out of every ten loan applications taken last week were for mortgage refinance.
Tuesday, January 25, 2011
The Treasury Department is set to auction a $35 billion stack of two-year notes today. It will be the first of a series of three auctions scheduled for the week.
The two-year note has drawn generally solid demand at auctions over the past two years, and most observers expect today's event will also be well bid. If so, look for mortgage interest rates to remain essentially unchanged for the day. In the unlikely event this offering requires Uncle Sam to "sweeten-the-pot" by pushing the yield on the 2-year note higher - expect mortgage interest rates to move higher as well.
Earlier this morning the Conference Board (a private, non-profit organization that compiles and produces leading economic indicators for its clients) said consumer confidence rose more than expected in January to its highest level in eight months. The Conference Board said its index of consumer attitudes jumped to 60.6% in January from an upwardly revised 53.3% in December. Consumers rated business and labor market conditions more favorably and expressed greater confidence that the economy will continue to expand and generate more jobs in the months ahead. Mortgage investors are typically far more interested in what consumers are actually doing - rather than how they say they are feeling. Even so, the outsized spike in January consumer confidence created a bit of a headwind as mortgage interest rates took a stab at moving fractionally lower in today's early going.
The balance of the week's economic reports include December New Home Sales on Wednesday, initial weekly jobless claims and December Durable Goods Orders on Thursday and on Friday market participants will get a look at the first estimate of the pace of economic growth in the last-quarter of 2010 (as measured by Gross Domestic Product). These reports will add a little empirical evidence to support the broad opinion of most credit market participants that the economic recovery from the worst slump since the Great Depression gained a little momentum as the previous year drew to a close. This is a view that has already been well priced into the mortgage market - so further upward adjustments to mortgage interest rates as a direct result of this week's battery of economic reports will likely be small - if they occur at all.
The two-year note has drawn generally solid demand at auctions over the past two years, and most observers expect today's event will also be well bid. If so, look for mortgage interest rates to remain essentially unchanged for the day. In the unlikely event this offering requires Uncle Sam to "sweeten-the-pot" by pushing the yield on the 2-year note higher - expect mortgage interest rates to move higher as well.
Earlier this morning the Conference Board (a private, non-profit organization that compiles and produces leading economic indicators for its clients) said consumer confidence rose more than expected in January to its highest level in eight months. The Conference Board said its index of consumer attitudes jumped to 60.6% in January from an upwardly revised 53.3% in December. Consumers rated business and labor market conditions more favorably and expressed greater confidence that the economy will continue to expand and generate more jobs in the months ahead. Mortgage investors are typically far more interested in what consumers are actually doing - rather than how they say they are feeling. Even so, the outsized spike in January consumer confidence created a bit of a headwind as mortgage interest rates took a stab at moving fractionally lower in today's early going.
The balance of the week's economic reports include December New Home Sales on Wednesday, initial weekly jobless claims and December Durable Goods Orders on Thursday and on Friday market participants will get a look at the first estimate of the pace of economic growth in the last-quarter of 2010 (as measured by Gross Domestic Product). These reports will add a little empirical evidence to support the broad opinion of most credit market participants that the economic recovery from the worst slump since the Great Depression gained a little momentum as the previous year drew to a close. This is a view that has already been well priced into the mortgage market - so further upward adjustments to mortgage interest rates as a direct result of this week's battery of economic reports will likely be small - if they occur at all.
Monday, January 24, 2011
Credit market participants are rearranging their portfolios just a bit this morning to make room to accommodate the Treasury Department's three-part, $99 billion note sale.
The Treasury will sell $35 billion of two-year notes on Tuesday, $35 billion of five-year notes on Wednesday and $29 billion of seven-year notes on Thursday. In recent weeks the yield on each of these three debt instruments has moved toward the top of their respective trading range - a condition that should help attract underinvested players.
The Fed has plans to buy a total of $29 billion of government debt obligations this week as part of their "QE2" stimulus program which should help to stabilize the bidding at the debt auctions as well. Well bid Treasury auctions will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates while poorly bid auctions are almost sure to push note interest rates higher.
The "wild card" event of the week will be President Obama's State of the Union address tomorrow evening. Credit market participants will be listening intently for clues as to whether the President appears willing to strike a deal with Republicans to cut spending in exchange for a national debt limit increase. The "so what" factor here is straightforward.
As of January 20th, the national debt stood at $14.004 trillion, just 290 billion below the congressionally mandated limit. The Treasury has estimated that based on recent spending and revenue trends, the government will run out of funding authority as early as March 31st. If the debt limit is not extended -- the government will not have the funding capacity to run its day-to-day operations -- which includes paying interest on money it already owes to its debt holders.
Without an extension of the debt ceiling -- not only will many government offices be shutdown - the U.S. would be very vulnerable to suffering a heavy round of punishment delivered by its debt holders in the form of sharply higher interest rates - a condition, should it develop, that will undoubtedly push mortgage interest rates higher. The good news is that there is little sign in the credit markets right now that investors are deeply concerned about this potential issue. Depending how the political rhetoric develops starting on Tuesday evening -- market participants' current halfhearted and/or dismissive attitude toward this matter will change in the blink-of-an-eye.
The manner and financial processes the President and Congress choose to employ as they address the national debt ceiling issue certainly packs enough potential "firepower" to make a big difference in rate sheets over the course of a very short period of time. Heads up.
The coming week's economic reports include December New Home Sales on Wednesday, initial weekly jobless claims and December Durable Goods Orders on Thursday and on Friday market participants will get a look at the first estimate of the pace of economic growth in the last-quarter of 2010 (as measured by Gross Domestic Product). These reports will add a little empirical evidence to support the broad opinion of most credit market participants that the economic recovery from the worst slump since the Great Depression gained a little momentum as the previous year drew to a close. This is a view that has already been well priced into the mortgage market - so further upward adjustments to mortgage interest rates as a direct result of this week's battery of economic reports will likely be small - if they occur at all.
The Treasury will sell $35 billion of two-year notes on Tuesday, $35 billion of five-year notes on Wednesday and $29 billion of seven-year notes on Thursday. In recent weeks the yield on each of these three debt instruments has moved toward the top of their respective trading range - a condition that should help attract underinvested players.
The Fed has plans to buy a total of $29 billion of government debt obligations this week as part of their "QE2" stimulus program which should help to stabilize the bidding at the debt auctions as well. Well bid Treasury auctions will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates while poorly bid auctions are almost sure to push note interest rates higher.
The "wild card" event of the week will be President Obama's State of the Union address tomorrow evening. Credit market participants will be listening intently for clues as to whether the President appears willing to strike a deal with Republicans to cut spending in exchange for a national debt limit increase. The "so what" factor here is straightforward.
As of January 20th, the national debt stood at $14.004 trillion, just 290 billion below the congressionally mandated limit. The Treasury has estimated that based on recent spending and revenue trends, the government will run out of funding authority as early as March 31st. If the debt limit is not extended -- the government will not have the funding capacity to run its day-to-day operations -- which includes paying interest on money it already owes to its debt holders.
Without an extension of the debt ceiling -- not only will many government offices be shutdown - the U.S. would be very vulnerable to suffering a heavy round of punishment delivered by its debt holders in the form of sharply higher interest rates - a condition, should it develop, that will undoubtedly push mortgage interest rates higher. The good news is that there is little sign in the credit markets right now that investors are deeply concerned about this potential issue. Depending how the political rhetoric develops starting on Tuesday evening -- market participants' current halfhearted and/or dismissive attitude toward this matter will change in the blink-of-an-eye.
The manner and financial processes the President and Congress choose to employ as they address the national debt ceiling issue certainly packs enough potential "firepower" to make a big difference in rate sheets over the course of a very short period of time. Heads up.
The coming week's economic reports include December New Home Sales on Wednesday, initial weekly jobless claims and December Durable Goods Orders on Thursday and on Friday market participants will get a look at the first estimate of the pace of economic growth in the last-quarter of 2010 (as measured by Gross Domestic Product). These reports will add a little empirical evidence to support the broad opinion of most credit market participants that the economic recovery from the worst slump since the Great Depression gained a little momentum as the previous year drew to a close. This is a view that has already been well priced into the mortgage market - so further upward adjustments to mortgage interest rates as a direct result of this week's battery of economic reports will likely be small - if they occur at all.
Friday, January 14, 2011
December retail sales rose slightly less than expected, posting a gain of 0.6% versus the 0.8% increase economists had anticipated. Stripping out auto sales, retail sales were up 0.5%. The December sales gain capped six consecutive months of sales improvement. For the entire year sales were up 6.7% in 2010, the largest yearly gain since an 8.2% jump in 1999. Even though retailers' cash registers were ringing more loudly than they have in some time last year -- the underlying inflation pressure at the consumer level remained tame.
The Labor Department reported this morning that the consumer price index edged 0.5% higher last month, led by higher energy costs. The core rate of inflation at the consumer level, which excludes the more volatile food and energy prices, increased a very modest 0.1%.
A separate report this morning showed a surprisingly large gain of 0.8% for industrial production last month - but capacity utilization remained well below levels where production bottlenecks might be expected to create delivery delays -- which in-turn could ignite a round of inflation producing price increases as supply falls below demand.
The collective story found in this morning's battery of reports points to an economy that is expanding - but well below a pace that might be expected to create inflation pressures - and that's a story that could not be much better for the near-term prospects for steady to perhaps fractionally lower mortgage interest rates.
Looking ahead to the coming holiday shortened week - nothing in the way of market moving data appears on the calendar. Wednesday the Commerce Department will release the December housing starts and building permits numbers and Thursday will feature the weekly initial claims data for the week ended January 15th, December leading indicators and the existing home sale figures.
I expect the trend trajectory of mortgage interest rates next week will be far more influenced by trading action in the stock markets than by any of the scheduled economic releases. If my assessment is correct, falling stock prices will tend to support steady to perhaps fractionally lower mortgage interest rates while rising stock prices will likely drag mortgage interest rates higher as well.
The Labor Department reported this morning that the consumer price index edged 0.5% higher last month, led by higher energy costs. The core rate of inflation at the consumer level, which excludes the more volatile food and energy prices, increased a very modest 0.1%.
A separate report this morning showed a surprisingly large gain of 0.8% for industrial production last month - but capacity utilization remained well below levels where production bottlenecks might be expected to create delivery delays -- which in-turn could ignite a round of inflation producing price increases as supply falls below demand.
The collective story found in this morning's battery of reports points to an economy that is expanding - but well below a pace that might be expected to create inflation pressures - and that's a story that could not be much better for the near-term prospects for steady to perhaps fractionally lower mortgage interest rates.
Looking ahead to the coming holiday shortened week - nothing in the way of market moving data appears on the calendar. Wednesday the Commerce Department will release the December housing starts and building permits numbers and Thursday will feature the weekly initial claims data for the week ended January 15th, December leading indicators and the existing home sale figures.
I expect the trend trajectory of mortgage interest rates next week will be far more influenced by trading action in the stock markets than by any of the scheduled economic releases. If my assessment is correct, falling stock prices will tend to support steady to perhaps fractionally lower mortgage interest rates while rising stock prices will likely drag mortgage interest rates higher as well.
Monday, January 10, 2011
The government is scheduled to sell a combined $66 billion worth of Treasury debt obligations this week: $32 billion of 3-year notes tomorrow; $21 billion of 10-year debt on Wednesday and $13 billion of 30-year bonds on Thursday. The auctions will conclude at 1:00 p.m. ET.
Because of its relatively short duration the 3-year note offering will likely draw sufficient demand from domestic and global investors that this event will not be much of a factor in terms of influencing the direction of mortgage interest rates. The 10-year and 30-year bond offerings represent a bigger concern.
According to data complied by Daniel Kruger, a correspondent for Bloomberg.com, Wall Street banks are cutting their holdings of Treasuries at the fastest pace since 2004. These firms are redeploying this capital in anticipation the economy will strengthen and demand for higher-yielding assets like stocks and corporate debt instruments will increase. The 18 primary dealers that trade with the Federal Reserve reported that their collective holdings of government debt tumbled to a net $2.34 billion on December 29th -- from $81.3 billion on November 24th. That is a heck of a job of house cleaning in anybody's book - and it does not particularly bode well for the likelihood these major broker/dealers will show up with big buying appetites at this week's government debt auctions.
Keep your fingers crossed that ongoing sovereign debt turmoil in the euro zone together with the fact that the upcoming supply of 10- and 30-year Treasuries are on track to be sold at their highest level in seven months will be enough incentive to induce foreign investors to show up aggressively on Wednesday and Thursday. If one or both of these auctions are poorly bid -- it is almost a certainty that mortgage investors will push note rates higher. Heads up.
Because of its relatively short duration the 3-year note offering will likely draw sufficient demand from domestic and global investors that this event will not be much of a factor in terms of influencing the direction of mortgage interest rates. The 10-year and 30-year bond offerings represent a bigger concern.
According to data complied by Daniel Kruger, a correspondent for Bloomberg.com, Wall Street banks are cutting their holdings of Treasuries at the fastest pace since 2004. These firms are redeploying this capital in anticipation the economy will strengthen and demand for higher-yielding assets like stocks and corporate debt instruments will increase. The 18 primary dealers that trade with the Federal Reserve reported that their collective holdings of government debt tumbled to a net $2.34 billion on December 29th -- from $81.3 billion on November 24th. That is a heck of a job of house cleaning in anybody's book - and it does not particularly bode well for the likelihood these major broker/dealers will show up with big buying appetites at this week's government debt auctions.
Keep your fingers crossed that ongoing sovereign debt turmoil in the euro zone together with the fact that the upcoming supply of 10- and 30-year Treasuries are on track to be sold at their highest level in seven months will be enough incentive to induce foreign investors to show up aggressively on Wednesday and Thursday. If one or both of these auctions are poorly bid -- it is almost a certainty that mortgage investors will push note rates higher. Heads up.
Wednesday, January 5, 2011
The mortgage market is taking a beating this morning - driven by a report from private payroll company ADP indicating private employers added 297,000 jobs in December - well ahead of November's revised gain of 92,000. ADP said the December payroll increase was the largest single gain since it first began releasing the data in 2000. Even though the ADP numbers are notorious for falling wide of the government's far more important nonfarm payroll figures -investors decided to be "safe rather than sorry" and have been pushing mortgage interest rates higher all morning. This heavy selling pressure may soon prove to have been a mistake.
In a separate report a little later in the day, the Institute of Supply Management's Service Sector index, which covers about 90% of the economy, showed that while overall activity in industries ranging from merchants to health care, housing, finance, and food services improved 2.1% from November's levels - overall employment dropped 2.2% for December.
Hmmm - now there is a head scratcher for you. ADP says private employers were adding new employees to their payrolls by the thousands - but the government data says that their numbers show that employment actually declined during the month.
So which is it? Did private payrolls explode in December as ADP indicates or did private payrolls turn in a weak performance as the government data wonks say it did.
The correct answer probably lays somewhere in the middle. My bet is that Friday's December headline nonfarm payroll gains will fall within shouting distance of the consensus estimate calling for a net gain of 130,000 to 140,000 new jobs with the national jobless rate retreating fractionally to 9.7% from November's 9.8%. If this assessment proves accurate, it is highly likely the heavy selling pressure we've experienced in the mortgage market this morning will be largely reversed on Friday.
In a separate report a little later in the day, the Institute of Supply Management's Service Sector index, which covers about 90% of the economy, showed that while overall activity in industries ranging from merchants to health care, housing, finance, and food services improved 2.1% from November's levels - overall employment dropped 2.2% for December.
Hmmm - now there is a head scratcher for you. ADP says private employers were adding new employees to their payrolls by the thousands - but the government data says that their numbers show that employment actually declined during the month.
So which is it? Did private payrolls explode in December as ADP indicates or did private payrolls turn in a weak performance as the government data wonks say it did.
The correct answer probably lays somewhere in the middle. My bet is that Friday's December headline nonfarm payroll gains will fall within shouting distance of the consensus estimate calling for a net gain of 130,000 to 140,000 new jobs with the national jobless rate retreating fractionally to 9.7% from November's 9.8%. If this assessment proves accurate, it is highly likely the heavy selling pressure we've experienced in the mortgage market this morning will be largely reversed on Friday.
Monday, January 3, 2011
The Institute of Supply Management reported this morning that their index of activity in the manufacturing sector rose slightly from November's 56.6% to 57.0% in December. This marks the second increase in the past three months and puts the index at its highest level since May. Though production remains sturdy, it is not yet translating into expanding job creation - the employment component of this index experienced a 2-point decline from month earlier levels.
The unexpected drop in job creation at the nation's factories probably has many analysts making some downward adjustments to their forecast for the headline December nonfarm payroll report due on Friday at 8:30 a.m. ET.
As I write the majority of market participants are anticipating the economy created 130,000 more jobs in December than it lost -- while the national jobless rate is expected to edge back to 9.7% from November's 9.8% mark. Such an outcome is not totally out of the question. With the virtually certain drop in manufacturing job creation - and continued weakness from local, state, and federal employment -- it will take a supersized surge in private sector hiring to push the December headline nonfarm payroll number over the 130,000 mark.
The "wild card" this week will be trading action in the stock markets.
Strong economic data topped-off with a better than expected December nonfarm payroll data should be "just-the-thing" to extend the current rally in stock markets at the expense of higher mortgage interest rates. However, a weak December nonfarm payroll report will likely cause a heavy round of profit-taking in the stock markets to develop. If this scenario plays out, the flow of capital from riskier asset classes into the relative safe haven of Treasury obligations and mortgage-backed securities will be very supportive of steady to fractionally lower mortgage interest rates.
The unexpected drop in job creation at the nation's factories probably has many analysts making some downward adjustments to their forecast for the headline December nonfarm payroll report due on Friday at 8:30 a.m. ET.
As I write the majority of market participants are anticipating the economy created 130,000 more jobs in December than it lost -- while the national jobless rate is expected to edge back to 9.7% from November's 9.8% mark. Such an outcome is not totally out of the question. With the virtually certain drop in manufacturing job creation - and continued weakness from local, state, and federal employment -- it will take a supersized surge in private sector hiring to push the December headline nonfarm payroll number over the 130,000 mark.
The "wild card" this week will be trading action in the stock markets.
Strong economic data topped-off with a better than expected December nonfarm payroll data should be "just-the-thing" to extend the current rally in stock markets at the expense of higher mortgage interest rates. However, a weak December nonfarm payroll report will likely cause a heavy round of profit-taking in the stock markets to develop. If this scenario plays out, the flow of capital from riskier asset classes into the relative safe haven of Treasury obligations and mortgage-backed securities will be very supportive of steady to fractionally lower mortgage interest rates.
The labor sector is hemorrhaging job losses - 533,000 in November after revised losses of 320,000 in October and 403,000 in September. The national jobless rate edged higher to 6.7% last month from the 6.5% level in October. Senator Charles Schumer, a New York Democrat, chairman of the congressional Joint Economic Committee succinctly summed up mortgage investor sentiment this morning when he said, "The jobs picture today is staggering, and it should be all the evidence Washington needs to act swiftly and decisively to shore up this economy."
Mortgage investors could agree with Senator Schumer more. Market participants will continue to be very hesitant to push mortgage interest rates notably lower until they see clear signs that Uncle Sam is finally opening his checkbook in a meaningful way. Mortgage interest rates are currently tracing along the edge of levels our industry has ever seen. Without significant and sustained support from the government - private investors will be hesitant to add sizable portions of historically low yielding securities to their portfolio for fear of finding themselves ultimately holding the proverbial "financial bag" when economic conditions begin to improve.
Today's news from the labor sector did "bake-into-the-cake" a 50 basis-point drop in the Fed's benchmark fed fund rate at their upcoming two day meeting (Dec. 16 -17). The mortgage market won't likely respond much to such a move since it has been priced into the mortgage market for weeks. The Fed will probably have to cut the fed fund rate by at least 75 basis-points to induce much of a mortgage market friendly reaction.
Looking ahead to next week Friday's November Retail Sales figure will take center stage. Everybody expects disastrous retail sales numbers - so when they actually appear -- much of the market-moving "thunder" from the report will have already dissipated. With only minor data populating the balance of the calendar expect stock market trading action and news from Washington to dictate the trend trajectory of mortgage interest rates for most of the week.
Mortgage investors could agree with Senator Schumer more. Market participants will continue to be very hesitant to push mortgage interest rates notably lower until they see clear signs that Uncle Sam is finally opening his checkbook in a meaningful way. Mortgage interest rates are currently tracing along the edge of levels our industry has ever seen. Without significant and sustained support from the government - private investors will be hesitant to add sizable portions of historically low yielding securities to their portfolio for fear of finding themselves ultimately holding the proverbial "financial bag" when economic conditions begin to improve.
Today's news from the labor sector did "bake-into-the-cake" a 50 basis-point drop in the Fed's benchmark fed fund rate at their upcoming two day meeting (Dec. 16 -17). The mortgage market won't likely respond much to such a move since it has been priced into the mortgage market for weeks. The Fed will probably have to cut the fed fund rate by at least 75 basis-points to induce much of a mortgage market friendly reaction.
Looking ahead to next week Friday's November Retail Sales figure will take center stage. Everybody expects disastrous retail sales numbers - so when they actually appear -- much of the market-moving "thunder" from the report will have already dissipated. With only minor data populating the balance of the calendar expect stock market trading action and news from Washington to dictate the trend trajectory of mortgage interest rates for most of the week.
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