Thursday, August 13, 2009

Yesterday, in their post-meeting statement, the nation's central bankers said they saw reasons to believe economic activity is leveling out. Policymakers added, in almost footnote style, their assessment that sluggish income growth and continued job losses would likely constrain household spending.

Sure enough -- this morning's July Retail Sales figure showed a 0.1% drop in overall sales last month after a 0.8% gain in June. Excluding autos and parts sales -- the overall number posted a 0.6% decline in July after a solid 0.5% improvement in June. Granted, a part of the slump in headline retail sales was created by a retreat of 2.1% in gasoline prices during the month - but the key issue here is that the American consumer has not yet joined the recovery party. Until we see signs of significant and sustainable job market expansion -- most mortgage investors believe that it is probably premature to talk about the sustainability of the current economic recovery.

Speaking of job growth, the Labor Department reported this morning that the number of Americans filing for first-time jobless benefits unexpectedly rose by 4,000 last week, while the number of people still drawing unemployment support dropped by 141,000 to the lowest level since April. The best that can be said of current conditions in the labor sector is that the slope of the decline is not as steep as it was at the first of the year.

Today's rather puny economic news has rekindled anxiety about the vigor/sustainability of an economic recovery - which is causing some market participants to question if it is not time to liquidate riskier assets like stocks and plow those proceeds back into relative "safe-haven investments like government debt obligations and mortgage-backed securities. Against this backdrop the Treasury Department will be conducting the last of this week's three-part debt auctions with the gavel scheduled to fall on today's $15 billion of 30-year bonds at 1:00 p.m. ET. If today's offering is more solidly bid than yesterday's 10-year notes (a reasonable expectation) -- look for the current level of mortgage interest rates to remain unscathed to perhaps fractionally lower before the closing bell sounds. A crummy reception for today's 30-year bonds will almost certainly take a toll on the mortgage market in the form of higher interest rates.