Monday, January 4, 2010

HAPPY NEW YEAR!!

Mortgage investors will likely spend the majority of the week jockeying for position in front of Friday's much anticipated December Nonfarm Payroll report. Today's slightly higher than expected activity levels in the manufacturing sector as measured by the Institute of Supply Management is really little more than a side show.

Traders seem to be almost equally divided with respect to their views of what Friday's job report will reveal.

One group of traders believes for the first time in two years, the economy may have experienced a month in which more jobs were created than were destroyed. If Friday's December employment report shows positive growth in headline payrolls it will provide a powerful jolt to what has otherwise been a very sluggish recovery - and that's a condition almost certain to put notable upward pressure on mortgage interest rates.

The opposing group of traders look for businesses to take their sweet time resuming hiring, if for not other reason than the uncertainty surrounding the impact of heath care, taxation and regulation issues still being debated in Congress. Even if businesses are ready to rehire sooner, this group of traders believe fixing the labor market will not be a quick process. Since the start of the recession (estimated as late 2006 early 2007 -- depending on which economist you happen to talk to) about 7.9 million jobs have been lost. To put that number in perspective, there were 2.5 million jobs created in 2005, which was at the peak of the housing boom and a year in which the economy grew at a healthy 3.1% pace. Few economists expect that level of sustained economic growth over the next few years - and even if economic growth accelerated at that rate - it would take at least three years to recoup the lost jobs.

The sharp rise in mortgage interest rates over the last two-weeks of the year was largely created by conservative risk managers choosing to take a "safe-rather-than-sorry" approach to Friday's first major economic report of the new year -- by pricing-in expectations for the first increase in payroll growth since December 2007. Should this outlook prove too optimistic -- with December payrolls posting a loss of 20,000 or more -- a fairly large number of market participants will get caught leaning in the wrong direction - probably resulting in a relatively short-lived but nonetheless welcomed move to fractionally lower mortgage interest rates and higher prices.

Monday, December 21, 2009

With nothing in the way of new macro-economic data to guide them the few mortgage investors still at their desks appear to be taking their directional cues for mortgage interest rates from trading action in the stock market. In today's early going a solid rally in the stock market is exerting noticeable upward pressure on mortgage interest rats.

Evidently an increasing number of mortgage investors have begun factoring in the likelihood the economy is beginning to pick itself up off of the mat after being brought to its knees by the most severe recession since the Great Depression. Against this backdrop tomorrow's GDP report will likely invoke little, if any reaction from traders. The Existing and New Home Sales figures due on Tuesday and Wednesday respectively are also unlikely to trigger a Grinch like response from market participants.

The November personal income and spending report will be the "biggie of the week" with respect to economic news. Should Wednesday's core personal consumption expenditure index (a component of the November personal income and spending report) post a benevolent reading of +0.1% (as expected) - look for mortgage investors to do nothing more than make one more raid on the holiday goodies in the break-room -- before grabbing their coats and heading home to celebrate Christmas. The few traders that stay around until the final bell sounds at 2:00 p.m. ET will likely cover their few remaining open positions before the holiday break - which may just bring in enough buy orders to nudge mortgage prices a little higher. In my opinion, the chances remain pretty strong that last Friday's profit-taking sell-off in the mortgage market will continue for the first day or two of the week -- before showing a little potential rally on Wednesday and perhaps the half-day session of Thursday.

Friday, December 18, 2009

With nothing in the way of new macro-economic data to guide them, mortgage investors much decide whether to lock in some profits before the trading day comes to an end - or stick with the rally in hopes that it produces more upside gains before the early close for the Christmas Holiday next Thursday.

Look for trading action to become increasingly spasmodic as traders focus on making sure profits are safely registered "on-the-books" and as they put the final touches on their year-end positions. The likelihood that anyone will be aggressively adding large risk positions to their portfolio is small - limiting the potential for a notable move to yet lower mortgage interest rates before the New Year begins.

The few mortgage investors still at their desks next Tuesday will get a look at the final estimate of economic growth for the third-quarter. The majority of economists expect Q3 Gross Domestic Product will register a reading of 2.8% -- exactly matching the previous guesstimate. Tuesday also brings expectations for an improved pace of November existing home sales. The day starts off on Wednesday with the November Personal Income and Spending report. Contained within this data series is the Personal Consumption Expenditure Index, one of the Fed's favorite measure of inflation pressure at the consumer level. While both income and spending are expected to have edged a bit higher last month -- the pace of consumer inflation is expected to have posted a very modest, and mortgage market neutral gain of 0.1%. Wednesday's 10:00 a.m. release of the November New Home Sales and Thursday's initial weekly jobless claims and November durable goods orders numbers will likely draw as much investor attention/interest as a single snowflake in a blizzard. The mortgage market will close early at 2:00 p.m. ET on Thursday and will remain closed on Friday for the celebration of Christmas.

Thursday, December 17, 2009

The number of workers filing new applications for jobless benefits unexpectedly climbed by 7,000 during the week ended December 12th. It was the second straight week initial claims have posted a gain. Most mortgage investors were quick to dismiss this mornings' jump in the jobless claims data since the figures are notoriously volatile during the holiday season because of difficult seasonal adjustments.

Wednesday, December 16, 2009

The Federal Reserve is expected to stick to its mortgage market friendly monetary policy strategy when it wraps up its two-day meeting this afternoon at 2:15 p.m. ET.


Most analysts believe policymakers will be very hesitant to pull the plug on low interest rates too quickly due to persistent weakness in the labor sector, tight lending conditions at both the business and consumer levels, and a non-threatening inflation environment.


This morning's earlier news from the Labor Department indicating consumer prices rose a modest 0.4% in November while the more important core rate (a value that excludes the more volatile food and energy components) remained unchanged from month earlier levels - made the Fed's interest rate decision just a little bit easier. This morning's benign inflation reading at the consumer level went a long way toward tamping down budding inflation fears spurred by yesterday's stronger-than-expected uptick in November Producer Price index data series. For those still wringing their hands about inflation threats it is worth noting that the Fed's long-term forecast for their preferred measure of inflation, the Commerce Department index tied to consumer spending and excluding food and fuel, calls for gains in a range of 1.8% to 2.0%. That gauge, which is typically lower than the Consumer Price Index, was a mere 1.4% in the 12 months to October.


The "so what" factor here is significant. Amid tame inflation and elevated unemployment, the probabilities are extremely high the members of the Federal Open Market Committee will reaffirm their commitment to extremely low interest rates for an extended period. The committee will likely note the recent improvement in household spending and industrial production, but it will not likely use November's unexpected improvement in nonfarm payrolls to revise its overall economic and inflation outlook for its monetary stance. If this assessment proves accurate, the traditional post-meeting statement from the Fed (expected at 2:15 p.m. ET) will likely be mortgage interest rate neutral.


Any hint that the central bank is considering backing off of its asset purchase programs, or perhaps mulling an increase in its benchmark short-term interest rates will likely send mortgage interest rates notably higher. While it is worth noting this risk exists - the probability of such an outcome is exceptionally low.


In other news of the day, the Mortgage Bankers of America said mortgage applications nudged 0.3% higher during the week ended December 11th. Purchase applications fell 0.1% while refinance requests climbed 0.9%. The refinance share of mortgage activity increased to 75.2% of total applications from 74.4% last week. The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.9% up 0.4% from the previous week. The rate remained above the all-time low of 4.61% set in the week ended March 27 - but well below well below the year-ago level of 5.18%.

The mortgage market took-one-on-the-chin this morning when the Labor Department reported prices paid at the farm and factory gate jumped more than double the 0.8% gain most analysts had been expecting.


The headline November producer price index was up a surprising 1.8% while the core index (a value stripped of the more volatile food and energy components) posted a larger-than-expected 0.5% gain. The lion's share of the surge in the November producer price index figures was created by a strong uptick in energy costs and new model year price increase for light trucks. Crude oil prices hit $82 a barrel during the survey period for this data but has since retreated sharply - trading around $70 a barrel. Near record excess manufacturing capacity and a jobless rate that is projected to average 10% for much of 2010 will likely prevent suppliers from passing on these increasing costs through at least the end of the first-quarter of the New Year.



Mortgage investors are taking a cautious "wait-and-see" approach in front of the last Federal Open Market Committee meeting of 2009. The text and tone of the Committee's post-meeting statement (scheduled for release at 2:15 p.m. ET, Wednesday, December 16th) will contribute significantly to the trend trajectory of mortgage interest rates up and through the Christmas break.



Any hint that the central bank is considering backing off of its asset purchase programs, or perhaps mulling an increase in its benchmark short-term interest rates will likely send mortgage interest rates notably higher. While it is worth noting this risk exists - the probability of such an outcome is exceptionally low.



Even considering today's outsized gains in the November producer price index numbers -- the underlying pace of inflation remains by all measures comfortably within the Fed's stated "comfort zone." From a historical perspective it is worth noting there has never been a time that the Fed has begun to tighten short-term interest rates as unemployment rates were rising and inflation pressures remained benign.


As things now stand, the central bank will probably guardedly acknowledge the recent improvement in the nation's economic backdrop -- but will clearly renew its commitment to keep its benchmark short-term interest rates near zero for an "extended period." If this assessment proves accurate, look for this event to have little, if any significant influence on the trend trajectory of mortgage interest rates.

Monday, December 14, 2009

Boring.

Trading activity has almost ground to a standstill in the mortgage market as investors choose to take a cautious "wait-and-see" approach in front of the last Federal Open Market Committee meeting of 2009. The text and tone of the Committee's post-meeting statement (scheduled for release at 2:15 p.m. ET, Wednesday, December 16^th) will contribute significantly to the trend trajectory of mortgage interest rates up and through the Christmas break.

Any hint that the central bank is considering backing off of its asset purchase programs, or perhaps mulling an increase in its benchmark short-term interest rates will likely send mortgage interest rates notably higher. While it is worth noting this risk exists - the probability of such an outcome is exceptionally low.

The underlying pace of inflation remains by all measures comfortably within the Fed's stated "comfort zone." From a historical perspective there has never been a time that the Fed has begun to tighten short-term interest rates when unemployment rates were rising and inflation pressures remained benign. As things now stand, the central bank will probably guardedly acknowledge the recent improvement in the nation's economic backdrop -- but will clearly renew its commitment to keep its benchmark short-term interest rates near zero for an "extended period." If this assessment proves accurate, look for this event to have little, if any significant influence on the trend trajectory of mortgage interest rates.