Friday, January 8, 2010

The Labor Department reported earlier this morning that 85,000 more jobs were lost in December than were created. Revisions to prior month's figures showed the economy actually added 4,000 jobs in November rather than losing 11,000 as was initially reported. The government's "do-over" for October resulted in reported job losses of 127,000.


The majority of economists had projected a headline payroll loss in December of 8,000. These same economists are now blaming their wide miss on December job market conditions on the weather - pointing out two major storms blanked the Northeast and Midwest during the data survey period.


In my judgment, the fact the national jobless rate reminded at 10.0% in December is the most significant and telling element of the entire report. The detail in this morning's report showed there were 929,000 "discouraged workers" who had given up looking for a job, up from 642,000 a year earlier. The bid "so what" factor behind all this mumbo-jumbo is significant. If these people were still actively looking for work and had been counted as unemployed in the latest survey period -- the national jobless rate would have been 10.4% or higher. Since the current story from the labor sector strongly suggests employment growth will remain puny for sometime yet to come - today's job report is supportive of steady to potentially lower mortgage interest rates.


Looking ahead to next week -- Uncle Sam will take center stage from Monday to Thursday. He'll be in the credit markets looking to borrow roughly $100 billion in the form of inflation index 10-year notes on Monday, 3-year notes on Tuesday, 10-year notes on Wednesday and 30-year bonds on Thursday. Wednesday's 10-year notes and Thursday's 30-year bonds will likely exert the most potential upward pressure on mortgage rates.


In terms of macro-economic data Thursday's December Retail Sales figures and Friday's December Consumer Price Index will attract the most attention from mortgage investors. Both reports are expected to be mortgage market neutral.

Wednesday, January 6, 2010

Different day - same story.

Looming on the horizon is Friday's December nonfarm payroll report, which some expect to show the first month of job growth since December 2007 - a condition should it prevail -- will almost surely push mortgage interest rates higher and prices lower.

Other mortgage investors are absolutely convinced the December sell-off in the mortgage market pushed rates too high and prices too low - a condition that suggests these high-quality assets can currently be acquired at "garage-sale" prices.

One of these two groups of mortgage investors is headed for a spanking behind the financial woodshed - and the other will likely be calling random people in the phonebook to brag about their financial market genius.

Overhanging all of them is the fact that the direct government buying of mortgage-backed securities that drove 30-year fixed rate mortgages to historical lows in 2009 - is coming to an end in less than 90 days. To get to their total purchase authorization of $1.25 trillion by March 31^st - the Fed will need to buy about $8.5 billion a week in agency eligible mortgage-backed securities. The "so what" factor here is significant. From mid-November through mid-December the Fed's weekly net purchases of these securities totaled $16.5 billion - meaning Uncle Sam, the benevolent benefactor of the mortgage industry, is rapidly morphing from the most dominant player in the market into nothing more than a ghost of days gone by.

As I write, market chatter regarding the possibility the Fed will choose to expand and/or extend their direct mortgage-backed security purchase program is nothing more than just idle talk.

The probabilities are high that the rotation from a big-buyer spending taxpayers' money to a buyer spending private capital will initially result in higher mortgage interest rates and lower prices - no matter what the prevailing macro-economic data happens to be.

Bear-in-mind fixed income investors (those that actually buy and hold the mortgage-backed securities created from the loans you originate) live in the future - not the present. Trading decisions these investors make on a daily basis are largely predicated on market conditions they expect to prevail in the weeks and months yet to come - not the market conditions that may happen to develop between 10:00 a.m. ET and the close of trading for the day.

In other news of the day the Mortgage Bankers said their index of mortgage applications for the week ended January 1^st rose 0.5% from the previous week. The purchase application component of the index was up 3.6% while refinance loan requests fell 1.6%. Refinance applications accounted for 68.2% of all loan requests during the reporting period.

Tuesday, January 5, 2010

Looming on the horizon is Friday's December nonfarm payroll report, which some expect to show the first month of job growth since December 2007 - a condition should it prevail -- will almost surely push mortgage interest rates higher and prices lower.

Other mortgage investors are absolutely convinced the December sell-off in the mortgage market pushed rates too high and prices too low - a condition that suggests these high-quality assets can currently be acquired at "garage-sale" prices.

The capital market is an arena in which losers pay winners every day. One of these two groups of mortgage investors is headed for a spanking in the financial woodshed - and the other will likely be calling random people in the phonebook to brag about their financial market genius.

Overhanging all of them is the fact that the direct government buying of mortgage-backed securities that drove 30-year fixed rate mortgages to historical lows in 2009 - is coming to an end in less than 90 days. To get to their total purchase authorization of $1.25 trillion by March 31^st - the Fed will need to buy about $8.5 billion a week in agency eligible mortgage-backed securities. The "so what" factor here is significant. From mid-November through mid-December the Fed's weekly net purchases of these securities totaled $16.5 billion - meaning Uncle Sam, the benevolent benefactor of the mortgage industry, is rapidly morphing from the most dominant player in the market into nothing more than a ghost of days gone by.

The probabilities are high that the rotation from a big-buyer spending taxpayers' money to a buyer spending private capital will initially result in higher mortgage interest rates and lower prices - no matter what the activity levels in the manufacturing sector happen to be or whether the economy is creating or destroying jobs.

Bear-in-mind fixed income investors (those that actually buy and hold the mortgage-backed securities created from the loans you originate) live in the future - not the present. Trading decisions these investors make on a daily basis are largely predicated on market conditions they expect to prevail in the weeks and months yet to come - not the market conditions that may happen to develop between 10:00 a.m. ET and the close of trading for the day.

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.