Thursday, October 15, 2009

The trend trajectory of stocks and stronger-than-expected news from the labor sector and a slight uptick in the core consumer price index have combined to put additional upward pressure on mortgage interest rates during the early part of the trading day.


The uncertain start to the day for the stock markets has buffeted the mortgage market. The DOW has been whipsawing back and forth in a 50 point range during the first-half of the day - as the psychologically important 10,000 level is subjected to its first half-hearted sustainability test. Falling stock prices tend to be supportive of steady to fractionally lower mortgage interest rates while rising stock prices generally drag mortgage interest rates fractionally higher.


In a report confirming inflation pressures remain benign the Labor Department said its aggregate Consumer Price Index rose by 0.2% in September after posting a gain of 0.4% a month earlier. Stripping out volatile food and energy prices, the closely watched core measure of consumer inflation inched up to a reading of 0.2% -- a touch higher than most mortgage investors had been expecting. As zealously as these investors are protecting profits -- the ever so slight gain in the core rate of consumer inflation has evidently been deemed sufficient justification to push mortgage interest rates fractionally higher. That seems a bit of an extreme reaction to such a mild number - but then again we are dealing with the "Golden Rule" here - you know the one - "he/she who has the gold makes the rules".


In a separate report the Labor Department announced first-time claims for jobless benefits fell by 10,000 during the week ended October 10th. The decline was generally in range of investor expectations. Today's report marks the fifth consecutive decline for this economic metric in the past six weeks. This data tells a story of dwindling layoffs -- but detail in the report also shows the pace of hiring is nothing more than a trickle. The number of those claiming extended benefits or enrolling in the Emergency Unemployment Compensation programs continues to grow - and that's a situation that is not expected to start flashing signs of meaningful improvement until mid-2010.


All-in-all today's round of macro-economic data was pretty tame - so selling pressure is likely coming from some other area of concern - such as the inevitability of the Fed's withdrawal from the marketplace as the most aggressive buyer of mortgage-backed securities. From the first of the year the Fed has purchased roughly 80% of all the agency eligible mortgage-backed securities available - elbowing out a lot of private sector investors in the process. Now that the price of these securities are within shouting distance of their all-time high the Fed is asking the private sector to dive back into the marketplace. There is little doubt the private sector still maintains a healthy appetite for agency eligible mortgage-backed securities - but probably not at current price levels. If that assessment proves accurate, look for mortgage interest rates to begin a slow but progressive move to levels 50 basis point to 100 basis points higher than current levels within the next 12 months - no matter what the rest of the macro-economic picture might, or might not look like.