Thursday, April 30, 2009

At the conclusion of yesterday's meeting the Fed indicated that the pace of economic contraction appeared to be slowing and consumer spending was showing signs of stabilizing. The Fed's rather positive tone lit up the phone lines for stock brokers - as investors the world over decided to begin migrating capital currently in the low-return low-risk world of Treasury obligations and agency eligible mortgage-backed securities back into the higher-risk higher-return universe of the equity markets.

The rally in equity markets has certainly proven to be resilient. With that said -- there are still significant doubts about the longevity of the current stock market rally. A major downward correction in the stock indexes would undoubtedly be a major support for the prospects of steady to lower mortgage interest rates. It hasn't happened - and nothing says it "has" to happen - but a solid near-term mortgage market friendly sell-off in the stock markets isn't completely out of the question just yet.

As if to lend a little macro-economic support to my assessment of the health of the equity markets the Commerce Department reported that consumer spending slumped 0.2% in March after posting a 0.4% gain in February. Personal incomes fell by 0.3% after declining by 0.2% in February. The personal consumption expenditure index component of this report, a fancy title for one of the Fed's favorite measures of inflation at the consumer level, was unchanged from month earlier levels - a clear indication mortgage investors' radar screens remain free of any threat from rising prices and/or wages.
In a separate report the Labor Department said employment expenses posted a gain of 0.3% during the first quarter - the smallest gain on record. The Labor Department went on to say that the number of workers filing for first-time jobless benefits declined by 14,000 last week. The four-week moving average of new jobless claims, a better gauge of underlying labor trends because it irons out week-to-week volatility, declined for the third week in a row. The initial claims data is not suggesting the end of the massive reduction in the labor force is over - but it is hinting that it may not get significantly worse from current levels.