Friday, June 26, 2009

Trading activity is light this morning in the mortgage market with the action primary dominated by traders looking to take profits after this week's 100 basis-point rally. The strong improvement in the mortgage market over the past five trading sessions was driven by the unexpectedly robust demand for 2-, 5- and 7-year notes during the three-part Treasury auction that wrapped up yesterday afternoon. This is the first-time this year when the month-end Treasury auction did not cause a sharp sell-off in the credit markets.

Mortgage investors were relieved by the inflation numbers contained in this morning's May Income and Spending report from the Commerce Department. Personal incomes soared 1.4% last month as social benefit payments flowing from the government's massive economic stimulus package worked their way into the data. Excluding the impact of the stimulus package, disposable incomes rose a more humble 0.2%. Consumer spending during May rose 0.3% -- its first monthly increase since February.

The best news of all was found in the personal consumption expenditure index component of the report, a measure of inflation closely watched by the Fed. This gauge of inflation pressures at the consumer level rose a very modest 0.1% last month, its smallest monthly gain since records began in 1959. On a year-over-year basis the personal consumption expenditure index is up a very modest 1.8%.

The coming holiday shortened week will start off slow - but will end with a bang. The calendar is completely void of economic news until Wednesday morning's release of the Institute of Supply Management report on last month's activity levels in the nation's manufacturing sector. The current consensus among economists is that while activity probably improved during the month of May - it won't be high enough to suggest a recovery in the sector has begun in earnest.

On Thursday the Labor Department will release the June nonfarm payroll figures with most analysts anticipating a headline number showing a loss of 355,000 jobs as the national unemployment rate inches up to 9.6%.

Mortgage investors have already priced in these expectations so -- should the consensus estimates prove generally accurate -- the impact on the direction of mortgage interest rates will likely be negligible. In the unlikely event the Institute of Supply Management's index of manufacturing activity exceeds 45.5% and/or last month's job losses prove to be less severe than projected - mortgage interest rates will almost certainly creep higher into the Fourth of July weekend (the mortgage market will be closed on Friday, July 3^rd).