Friday, August 14, 2009

The mortgage market is experiencing a rally this morning spawned by relief that the record-breaking $75 billion three-part Treasury auction is over and by news from the Labor Department indicating inflation pressures at the consumer level remain near record lows.

The Consumer Price Index, the government's broadest gauge of inflation on Main Street, was unchanged in July, following a 0.7% increase in June. Compared to the same period last year, consumer prices have fallen 2.1%, the largest decline in this measure since January 1950. The core rate of consumer inflation, a value which excludes volatile food and energy prices, edged up 0.1%. Compared to last July, the core inflation rate has risen 1.5%, the slowest advance for this metric since February 2004.

In a separate report the government said industrial production rose 0.5% in July - marking its first monthly increase since December of 2007. Most analysts were quick to discount much of this apparent improvement as a temporary result of the federal "cash-for-clunkers" program. The capacity utilization rate, a guesstimate of how much of the nation's total factory and utility production capabilities are actually being used, rose to 68.5% from June's 68.1%. The June mark for capacity utilization was the lowest since records began in 1967.

This morning's mortgage market friendly news is being shadowed by a growing sense among mortgage investors that until the massive wall of government debt overhanging the credit market is dramatically reduced -- it will be difficult if not impossible for mortgage interest rates to move notably below current levels - no matter what the economic data may say about the state of the economy.

The Fed has been the primary buyer in the mortgage market since the first of the year - purchasing roughly 80% of all new mortgage-backed securities coming to market. For the next couple of months the Fed will likely continue to show a solid buying appetite. As of last week, they have spent about $750 billion of the $1.25 trillion they have allocated for the direct purchase of mortgage-backed securities. In their post-meeting statement following this week's Federal Open Market Committee - Fed. Chairman Bernanke put market participants on notice that once the Fed has spent what money they have to spend - policymakers are unlikely to resurrect this particular program any time soon.

The central bank has slowed their average weekly purchases of mortgage-backed securities from $25 billion to something closer to $12.5 billion to try to get a little more mileage out of the available capital - but eventually other buyers will have to step in and take the Fed's place. I have no doubt that will happen - but the likelihood the replacements will make anywhere near the effort the Fed did to be mortgage market friendly is very small.

Next week will be pretty mild with respect to scheduled economic data. Tuesday's 8:30 a.m. dual release of July Housing Starts and Building Permits figures together with the July Producer Price Index will likely draw little more than a passing glance from mortgage investors. Thursday's 8:30 a.m. ET release of the initial jobless claims figure for the week ended 8/15 and Friday's July Existing Home Sales data won't likely be much of a "barn-burner" either.