Monday, March 16, 2009

The trend trajectory of mortgage interest rates will likely be strongly dictated by trading action in the stock markets. Higher stock prices will tend to nudge mortgage interest rates higher while lower stock prices will tend to support steady to fractionally lower rates.

There is an increasing number of indicators suggesting the rally in the stock market that began in earnest last Tuesday is vulnerable to a downward correction by the end of the week. From a timing perspective the strongest signature appears today, March 16th. If the assessment with respect to the price action in the Dow proves accurate, look for the prospects of steady to fractionally lower mortgage interest rates to benefit from the flow of capital out of equities and into the relative safe harbor of Treasury obligations and mortgage-backed securities. Wthout help from a sell-off in the stock markets -- the path of least resistance for mortgage interest rates is to higher levels.

The members of the Federal Open Market Committee are gathering for a two-day session beginning tomorrow and ending with the release of their monetary policy statement at 2:15 p.m. ET on Wednesday. Investors will scrutinize every word and nuance of the statement as Fed Chairman Bernanke and his fellow central bankers outline their thinking on how best to help the economy with short-term rates already near zero. Those investors hoping the Fed will announce a formalized initiative to push-down mortgage interest rates by becoming a direct buyer of Treasury obligations will likely be disappointed.

It is highly probable the Fed will choose to give other programs already in place - including their newly launched TALF project (Term Asset-Backed Securities Loan Facility) - a chance to work before giving serious consideration to any other initiatives.

This week's economic calendar includes the release of the Producer Price Index on Tuesday and the companion Consumer Price Index on Wednesday. Both measures of inflation pressure are expected to remain benign and should therefore exert little if any influence on the direction of mortgage interest rates.