Friday, March 27, 2009

Trading activity in the mortgage market is light and sporadic this morning.

The Federal Reserve was an active buyer of $7.5 billion of 2- and 3-year securities earlier today. Central banker’ spent a matching sum on Wednesday when they kicked off their program to acquire up to $300 billion in longer-dated Treasury obligations. The move, known as quantitative easing, is designed to serve as a temporary anchor to prevent interest rates (including mortgage interest rates) – from rising too quickly given the strain created by the current $2+ trillion government borrowing need. There is obviously a huge difference between the amount the Fed has available to spend in their effort to retard the rise of interest rates in general -- and the amount off supply the Treasury intends to dump into the credit market. In this endeavor the Fed is essentially taking a knife to a gunfight. Sure, they may draw a little attention initially – but they will undoubtedly be quickly overwhelmed – and when the inevitable happens – interest rates (including those on mortgages) will begin to move progressively higher.

Today’s macro-economic news had no influence on the current trend trajectory of mortgage interest rates.

The Commerce Department reported this morning that consumer spending rose for a second straight month even as incomes reversed the prior month’s gain. As most analysts expected, spending improved by 0.2% last month while incomes fell by 0.2%. The core rate of inflation (a value that excludes the more volatile food and energy components) at the consumer level proved to be a little “hotter” than expected – posting a gain of 0.2% instead of the modest 0.1% rise most economists had been forecasting.

Looking head to next week -- the few economic reports scheduled to be released during the early part of the week will be completely overshadowed by Friday’s February Nonfarm payroll figures. Nobody expects the numbers to show any sign of job creation – but if the data indicates the pace of job loss is beginning to taper off --such news will likely tend to put some upward pressure on mortgage interest rates.

As mentioned here before – from a technical perspective there are reasons to believe the recent rally in the stock market is living on borrowed time. If assessments proves accurate, the stock markets will experience a fairly sharp round of profit-taking that will perhaps push the value of the Dow back all the way down into the 7300 to 7100 value range. A swoon in the stock market of this magnitude, should it develop, will tend to be supportive of steady to fractionally lower mortgage interest rates. If such an event is going to occur – I think it will manifest itself no later than today, March 27th or Monday, March 30th.