Wednesday, July 1, 2009

Mortgage investors are slogging through another day of relatively thin, indecisive trading action. The day's economic data was at best a "mixed-bag" - and did nothing to clarify likely mortgage interest rate direction.

On the mortgage market friendly side of the ledger the private ADP employment report showed notably weaker payroll growth in June than most observers had expected. Joining the ADP report in support of steady to fractionally lower rates was the Mortgage Bankers of America report indicating their seasonally adjusted index of mortgage applications, including requests for refinancing as well as purchase money, dropped 18.8% during the week ended November 21, 2008 as consumers' job concerns, inability to sell existing homes, and appraisal issues took a toll on loan demand.

In the convoluted world of mortgage interest rates these two reports are both considered to be signs of economic weakness - and therefore supportive of the prospects for steady to fractionally lower mortgage interest rates.

Offsetting the mortgage interest rate friendly ADP and MBA reports was data from the Institute of Supply Management showing conditions in the manufacturing sector continued to improve noticeably in June. The ISM's factory activity index rose to 44.8 last month, its highest level since August -- while the production index climbed to 52.5, it highest level since September. The overall strength in the ISM index is leading most analysts to conclude the worst of the recession is over in the manufacturing sector.

The National Association of Realtors chimed in this morning with a report showing the number of Americans signing contracts to buy previously owned home rose in May for the fourth consecutive month -- while global outplacement consultants Challenger, Gray & Christmas said planned job cuts by corporate America are down 33% from May levels. Last but not lest traders are anxiously waiting this morning's announcement from the Treasury Department regarding the size of next Tuesday's 3-year note auction, Wednesday's 10-year note auction and Thursday's 30-year bond offering.

Tomorrow's morning's 8:30 a.m. ET release of the June nonfarm payroll figures remains the dominant event of the week. Investors have already priced in expectations the number of jobs lost in June will match or exceed the consensus estimate of 355,000. The national jobless rate is projected to ratchet up to 9.6% and that view is also reflected in current prices. All will be well in the mortgage market as long as the actual numbers match or show an even worse picture of the labor sector than investors have already cranked in to their pricing models. That is one side of a two sided coin.

The other possibility is that the actual numbers show a labor sector stronger than the majority of market participants anticipated. If that's the case, Thursday's payroll data will immediately light a very short fuse on a very powerful firecracker - resulting in a mad scramble by investors to get out of the way before they get financially singed by the "hot" economic news. Such a condition, should it develop, almost always results in higher mortgage interest rates.