Wednesday, May 14, 2009

Trading activity in the mortgage market is slow in this morning's early going. Stronger-than-expected readings on prices paid to factories, farmers, and other producers together with a surge in the number of workers seeking jobless benefits during the week ended May 9th did not cause much of a stir among mortgage investors.

The Labor Department reported a 0.3% increase in the headline April producer price index and a 0.2% jump in the core rate of the index (a value that excludes the more volatile food and energy components).

In a separate report the Labor Department said the number of workers filing first-time claims for unemployment benefits climbed by 32,000 last week. A Labor Department spokesman said, ". a good part of the increase is due to automotive states and claims" related to the bankruptcy of Chrysler. The four-week moving average of claims, considered to be a better gauge of underlying jobless trends because it smoothes out week-to-week volatility, rose by 6,000 - the first such increase in four weeks.

These two reports essentially cancelled each other out with respect to their impact on the mortgage market. Rising price pressure at the producer level (a generally mortgage market unfriendly event) was offset by notable jump in unemployment claims (a generally mortgage market friendly event).
The Fed continues to be a formidable presence in the mortgage market - aggressively buying mortgage-backed securities and Treasury debt obligations in support of steady to fractionally lower mortgage interest rates. The Fed has set a goal to buy up to $1.25 trillion of agency-eligible mortgage-backed securities, $300 billion of Treasuries and $200 billion of the agency debt instruments of Fannie Mae and Freddie Mac. As of last Friday, the Fed's direct purchase of mortgage-backed securities and agency debt totaled $429.7 billion. The central bank has spent $72 billion in direct purchases of Treasury debt obligations.

As long as this financial firepower is sustained - mortgage interest rates are unlikely to move sharply higher from current levels. That is not to say mortgage interest rates won't move higher - it simply means the slope of increase will likely remain, at worst, nothing but a gentle upward gradient for several more months.