Tuesday, December 1, 2009

The Dubai saga that agitated financial markets last week is coming to an end. The rest of the world is starting to minimize the Dubai World story now. Dubai is in talks with its lenders to restructure $26 billion of debt, easing concerns that a default would add to the $1.7 trillion financial companies around the world have written down as the credit crisis impaired the value of their assets. The general sense among credit market participants is that fallout from the Dubai situation will be both short-lived and very limited. The resulting flow of capital that poured into the relatively safety of U.S. government debt obligations and mortgage-backed securities late last week as the Dubai story hit the newswires is now flowing back out into riskier asset classes like stocks -- creating some slight upward pressure on mortgage interest rates in today's early going.



The Institute for Supply Management (a not-for-profit United States association established for the benefit of the purchasing and supply management profession, particularly in the areas of education and research) reported their November measure of overall national manufacturing activity decelerated to 53.6% from 55.7% in October. The modest decline in the overall index did not ring any alarm bells among mortgage investors since the index remains consistent with the general view that industrial production growth and growth within the economy in general will be sustained into the foreseeable future. That perspective is already reflected on virtually every mortgage rate sheet in the marketplace.



In other news of the day the National Association of Realtors reported its Pending Home Sales Index (a measure of the number of contracts signed for the sale of existing homes) rose a better than expected 3.7% in October, its ninth consecutive monthly gain. The housing market, one the primary triggers of the worst U.S. recession in 70 years, continues to show signs of recovering from a three-year decline. However, many mortgage investors are discounting the current improvement in the housing market, reasoning that the recovery is artificially supported by tax credits for both first-time and move up borrowers and by mortgage interest rates resting near historical lows due to direct government intervention. This particular report will not likely exert much, if any influence on the direction of mortgage interest rates until/unless it reflects market conditions devoid of the massive but temporary government support programs.



To sustain the current level of mortgage interest rates will likely require softer-than-expected November employment numbers on Friday and/or a major sell-off in the stock markets. While both outcomes are certainly possible - they are each in their own right not very probable.
In my judgment, Friday's headline nonfarm payroll report will need to show the economy lost more than 150,000 jobs and/or the national jobless rate exceeded 10.3% last month in order to induce mortgage investors to push mortgage interest rates notably lower. In terms of stock market trading activity it will likely take a convincing move below the 10,200 mark for the Dow Jones Industrial Average before a sustained flow of capital out of the stock market could be counted on to support the prospects for notably lower mortgage interest rates.