December retail sales rose slightly less than expected, posting a gain of 0.6% versus the 0.8% increase economists had anticipated. Stripping out auto sales, retail sales were up 0.5%. The December sales gain capped six consecutive months of sales improvement. For the entire year sales were up 6.7% in 2010, the largest yearly gain since an 8.2% jump in 1999. Even though retailers' cash registers were ringing more loudly than they have in some time last year -- the underlying inflation pressure at the consumer level remained tame.
The Labor Department reported this morning that the consumer price index edged 0.5% higher last month, led by higher energy costs. The core rate of inflation at the consumer level, which excludes the more volatile food and energy prices, increased a very modest 0.1%.
A separate report this morning showed a surprisingly large gain of 0.8% for industrial production last month - but capacity utilization remained well below levels where production bottlenecks might be expected to create delivery delays -- which in-turn could ignite a round of inflation producing price increases as supply falls below demand.
The collective story found in this morning's battery of reports points to an economy that is expanding - but well below a pace that might be expected to create inflation pressures - and that's a story that could not be much better for the near-term prospects for steady to perhaps fractionally lower mortgage interest rates.
Looking ahead to the coming holiday shortened week - nothing in the way of market moving data appears on the calendar. Wednesday the Commerce Department will release the December housing starts and building permits numbers and Thursday will feature the weekly initial claims data for the week ended January 15th, December leading indicators and the existing home sale figures.
I expect the trend trajectory of mortgage interest rates next week will be far more influenced by trading action in the stock markets than by any of the scheduled economic releases. If my assessment is correct, falling stock prices will tend to support steady to perhaps fractionally lower mortgage interest rates while rising stock prices will likely drag mortgage interest rates higher as well.
Friday, January 14, 2011
Monday, January 10, 2011
The government is scheduled to sell a combined $66 billion worth of Treasury debt obligations this week: $32 billion of 3-year notes tomorrow; $21 billion of 10-year debt on Wednesday and $13 billion of 30-year bonds on Thursday. The auctions will conclude at 1:00 p.m. ET.
Because of its relatively short duration the 3-year note offering will likely draw sufficient demand from domestic and global investors that this event will not be much of a factor in terms of influencing the direction of mortgage interest rates. The 10-year and 30-year bond offerings represent a bigger concern.
According to data complied by Daniel Kruger, a correspondent for Bloomberg.com, Wall Street banks are cutting their holdings of Treasuries at the fastest pace since 2004. These firms are redeploying this capital in anticipation the economy will strengthen and demand for higher-yielding assets like stocks and corporate debt instruments will increase. The 18 primary dealers that trade with the Federal Reserve reported that their collective holdings of government debt tumbled to a net $2.34 billion on December 29th -- from $81.3 billion on November 24th. That is a heck of a job of house cleaning in anybody's book - and it does not particularly bode well for the likelihood these major broker/dealers will show up with big buying appetites at this week's government debt auctions.
Keep your fingers crossed that ongoing sovereign debt turmoil in the euro zone together with the fact that the upcoming supply of 10- and 30-year Treasuries are on track to be sold at their highest level in seven months will be enough incentive to induce foreign investors to show up aggressively on Wednesday and Thursday. If one or both of these auctions are poorly bid -- it is almost a certainty that mortgage investors will push note rates higher. Heads up.
Because of its relatively short duration the 3-year note offering will likely draw sufficient demand from domestic and global investors that this event will not be much of a factor in terms of influencing the direction of mortgage interest rates. The 10-year and 30-year bond offerings represent a bigger concern.
According to data complied by Daniel Kruger, a correspondent for Bloomberg.com, Wall Street banks are cutting their holdings of Treasuries at the fastest pace since 2004. These firms are redeploying this capital in anticipation the economy will strengthen and demand for higher-yielding assets like stocks and corporate debt instruments will increase. The 18 primary dealers that trade with the Federal Reserve reported that their collective holdings of government debt tumbled to a net $2.34 billion on December 29th -- from $81.3 billion on November 24th. That is a heck of a job of house cleaning in anybody's book - and it does not particularly bode well for the likelihood these major broker/dealers will show up with big buying appetites at this week's government debt auctions.
Keep your fingers crossed that ongoing sovereign debt turmoil in the euro zone together with the fact that the upcoming supply of 10- and 30-year Treasuries are on track to be sold at their highest level in seven months will be enough incentive to induce foreign investors to show up aggressively on Wednesday and Thursday. If one or both of these auctions are poorly bid -- it is almost a certainty that mortgage investors will push note rates higher. Heads up.
Wednesday, January 5, 2011
The mortgage market is taking a beating this morning - driven by a report from private payroll company ADP indicating private employers added 297,000 jobs in December - well ahead of November's revised gain of 92,000. ADP said the December payroll increase was the largest single gain since it first began releasing the data in 2000. Even though the ADP numbers are notorious for falling wide of the government's far more important nonfarm payroll figures -investors decided to be "safe rather than sorry" and have been pushing mortgage interest rates higher all morning. This heavy selling pressure may soon prove to have been a mistake.
In a separate report a little later in the day, the Institute of Supply Management's Service Sector index, which covers about 90% of the economy, showed that while overall activity in industries ranging from merchants to health care, housing, finance, and food services improved 2.1% from November's levels - overall employment dropped 2.2% for December.
Hmmm - now there is a head scratcher for you. ADP says private employers were adding new employees to their payrolls by the thousands - but the government data says that their numbers show that employment actually declined during the month.
So which is it? Did private payrolls explode in December as ADP indicates or did private payrolls turn in a weak performance as the government data wonks say it did.
The correct answer probably lays somewhere in the middle. My bet is that Friday's December headline nonfarm payroll gains will fall within shouting distance of the consensus estimate calling for a net gain of 130,000 to 140,000 new jobs with the national jobless rate retreating fractionally to 9.7% from November's 9.8%. If this assessment proves accurate, it is highly likely the heavy selling pressure we've experienced in the mortgage market this morning will be largely reversed on Friday.
In a separate report a little later in the day, the Institute of Supply Management's Service Sector index, which covers about 90% of the economy, showed that while overall activity in industries ranging from merchants to health care, housing, finance, and food services improved 2.1% from November's levels - overall employment dropped 2.2% for December.
Hmmm - now there is a head scratcher for you. ADP says private employers were adding new employees to their payrolls by the thousands - but the government data says that their numbers show that employment actually declined during the month.
So which is it? Did private payrolls explode in December as ADP indicates or did private payrolls turn in a weak performance as the government data wonks say it did.
The correct answer probably lays somewhere in the middle. My bet is that Friday's December headline nonfarm payroll gains will fall within shouting distance of the consensus estimate calling for a net gain of 130,000 to 140,000 new jobs with the national jobless rate retreating fractionally to 9.7% from November's 9.8%. If this assessment proves accurate, it is highly likely the heavy selling pressure we've experienced in the mortgage market this morning will be largely reversed on Friday.
Monday, January 3, 2011
The Institute of Supply Management reported this morning that their index of activity in the manufacturing sector rose slightly from November's 56.6% to 57.0% in December. This marks the second increase in the past three months and puts the index at its highest level since May. Though production remains sturdy, it is not yet translating into expanding job creation - the employment component of this index experienced a 2-point decline from month earlier levels.
The unexpected drop in job creation at the nation's factories probably has many analysts making some downward adjustments to their forecast for the headline December nonfarm payroll report due on Friday at 8:30 a.m. ET.
As I write the majority of market participants are anticipating the economy created 130,000 more jobs in December than it lost -- while the national jobless rate is expected to edge back to 9.7% from November's 9.8% mark. Such an outcome is not totally out of the question. With the virtually certain drop in manufacturing job creation - and continued weakness from local, state, and federal employment -- it will take a supersized surge in private sector hiring to push the December headline nonfarm payroll number over the 130,000 mark.
The "wild card" this week will be trading action in the stock markets.
Strong economic data topped-off with a better than expected December nonfarm payroll data should be "just-the-thing" to extend the current rally in stock markets at the expense of higher mortgage interest rates. However, a weak December nonfarm payroll report will likely cause a heavy round of profit-taking in the stock markets to develop. If this scenario plays out, the flow of capital from riskier asset classes into the relative safe haven of Treasury obligations and mortgage-backed securities will be very supportive of steady to fractionally lower mortgage interest rates.
The unexpected drop in job creation at the nation's factories probably has many analysts making some downward adjustments to their forecast for the headline December nonfarm payroll report due on Friday at 8:30 a.m. ET.
As I write the majority of market participants are anticipating the economy created 130,000 more jobs in December than it lost -- while the national jobless rate is expected to edge back to 9.7% from November's 9.8% mark. Such an outcome is not totally out of the question. With the virtually certain drop in manufacturing job creation - and continued weakness from local, state, and federal employment -- it will take a supersized surge in private sector hiring to push the December headline nonfarm payroll number over the 130,000 mark.
The "wild card" this week will be trading action in the stock markets.
Strong economic data topped-off with a better than expected December nonfarm payroll data should be "just-the-thing" to extend the current rally in stock markets at the expense of higher mortgage interest rates. However, a weak December nonfarm payroll report will likely cause a heavy round of profit-taking in the stock markets to develop. If this scenario plays out, the flow of capital from riskier asset classes into the relative safe haven of Treasury obligations and mortgage-backed securities will be very supportive of steady to fractionally lower mortgage interest rates.
The labor sector is hemorrhaging job losses - 533,000 in November after revised losses of 320,000 in October and 403,000 in September. The national jobless rate edged higher to 6.7% last month from the 6.5% level in October. Senator Charles Schumer, a New York Democrat, chairman of the congressional Joint Economic Committee succinctly summed up mortgage investor sentiment this morning when he said, "The jobs picture today is staggering, and it should be all the evidence Washington needs to act swiftly and decisively to shore up this economy."
Mortgage investors could agree with Senator Schumer more. Market participants will continue to be very hesitant to push mortgage interest rates notably lower until they see clear signs that Uncle Sam is finally opening his checkbook in a meaningful way. Mortgage interest rates are currently tracing along the edge of levels our industry has ever seen. Without significant and sustained support from the government - private investors will be hesitant to add sizable portions of historically low yielding securities to their portfolio for fear of finding themselves ultimately holding the proverbial "financial bag" when economic conditions begin to improve.
Today's news from the labor sector did "bake-into-the-cake" a 50 basis-point drop in the Fed's benchmark fed fund rate at their upcoming two day meeting (Dec. 16 -17). The mortgage market won't likely respond much to such a move since it has been priced into the mortgage market for weeks. The Fed will probably have to cut the fed fund rate by at least 75 basis-points to induce much of a mortgage market friendly reaction.
Looking ahead to next week Friday's November Retail Sales figure will take center stage. Everybody expects disastrous retail sales numbers - so when they actually appear -- much of the market-moving "thunder" from the report will have already dissipated. With only minor data populating the balance of the calendar expect stock market trading action and news from Washington to dictate the trend trajectory of mortgage interest rates for most of the week.
Mortgage investors could agree with Senator Schumer more. Market participants will continue to be very hesitant to push mortgage interest rates notably lower until they see clear signs that Uncle Sam is finally opening his checkbook in a meaningful way. Mortgage interest rates are currently tracing along the edge of levels our industry has ever seen. Without significant and sustained support from the government - private investors will be hesitant to add sizable portions of historically low yielding securities to their portfolio for fear of finding themselves ultimately holding the proverbial "financial bag" when economic conditions begin to improve.
Today's news from the labor sector did "bake-into-the-cake" a 50 basis-point drop in the Fed's benchmark fed fund rate at their upcoming two day meeting (Dec. 16 -17). The mortgage market won't likely respond much to such a move since it has been priced into the mortgage market for weeks. The Fed will probably have to cut the fed fund rate by at least 75 basis-points to induce much of a mortgage market friendly reaction.
Looking ahead to next week Friday's November Retail Sales figure will take center stage. Everybody expects disastrous retail sales numbers - so when they actually appear -- much of the market-moving "thunder" from the report will have already dissipated. With only minor data populating the balance of the calendar expect stock market trading action and news from Washington to dictate the trend trajectory of mortgage interest rates for most of the week.
Thursday, December 30, 2010
I think most seasoned mortgage investors will choose to discount rather sharply today's large 34,000 drop in the number of Americans standing in line to collect first-time unemployment benefits during the week ended December 25th.
Though it is true the labor sector appears to be making slow improvement, the weekly initial claims number this time of year typically overstates the employment story because of the difficulty of attributing for seasonality. Expect volatility in this data series to be high until the holiday employment factors completely "shake-out" by the first week or two of February.
Though it is true the labor sector appears to be making slow improvement, the weekly initial claims number this time of year typically overstates the employment story because of the difficulty of attributing for seasonality. Expect volatility in this data series to be high until the holiday employment factors completely "shake-out" by the first week or two of February.
Wednesday, December 29, 2010
Different day - same story.
Other than the initial jobless claims data for the week ended December 25th due out tomorrow morning - this week's economic calendar is completely void of anything that might cause a stir in the mortgage market.
Uncle Sam will wrap-up the last of his three-part auction schedule this week with today's sale of $29 billion worth of 7-year notes. The auction will conclude at 1:00p.m. ET.
If today's 7-year note auction is reasonably well-bid -- look for this event to be supportive of the prospects for steady to perhaps fractionally lower mortgage interest rates.
Other than the initial jobless claims data for the week ended December 25th due out tomorrow morning - this week's economic calendar is completely void of anything that might cause a stir in the mortgage market.
Uncle Sam will wrap-up the last of his three-part auction schedule this week with today's sale of $29 billion worth of 7-year notes. The auction will conclude at 1:00p.m. ET.
If today's 7-year note auction is reasonably well-bid -- look for this event to be supportive of the prospects for steady to perhaps fractionally lower mortgage interest rates.
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