Monday, June 29, 2009

Trading activity is light this morning in the mortgage market. Investors are uninspired to do much of anything with a large number of them choosing to keep their hands in their pockets as the 2^nd-quarter and the first-half of 2009 wind down. The majority of market participants will likely approach Thursday's nonfarm payroll data cautiously as well. No sense in taking a chance of getting burned by a potential "surprise" payroll number prior to a three-day weekend.

Investors have already priced in expectations the number of jobs lost in June will match or exceed the consensus estimate of 355,000. The national jobless rate is projected to ratchet up to 9.6% and that view is also reflected in current prices. All will be well in the mortgage market as long as the actual numbers match or show an even worse picture of the labor sector than investors have already cranked in to their pricing models. That is one side of a two sided coin.

The other possibility is that the actual numbers show a labor sector stronger than the majority of market participants anticipated. If that's the case, Thursday's payroll data will immediately light a very short fuse on a very powerful firecracker - resulting in a mad scramble by investors to get out of the way before they get financially singed by the "hot" economic news. Such a condition, should it develop, almost always results in higher mortgage interest rates.

Trading action in the stock markets will be the "wild card" in all of this. There are reasons to believe the Dow and NASDAQ are becoming increasingly vulnerable to a multi-day downside price correction. Should such an event occur, capital fleeing falling stock prices will tend to flow to the relative safe haven of Treasury obligations and mortgage-backed securities. This so called "flight-to-quality" is generally supportive of steady to fractionally lower mortgage interest rates. From a timing perspective - chances are good the stock markets will put in a multi-day price high on, or before July 8^th.

Friday, June 26, 2009

Trading activity is light this morning in the mortgage market with the action primary dominated by traders looking to take profits after this week's 100 basis-point rally. The strong improvement in the mortgage market over the past five trading sessions was driven by the unexpectedly robust demand for 2-, 5- and 7-year notes during the three-part Treasury auction that wrapped up yesterday afternoon. This is the first-time this year when the month-end Treasury auction did not cause a sharp sell-off in the credit markets.

Mortgage investors were relieved by the inflation numbers contained in this morning's May Income and Spending report from the Commerce Department. Personal incomes soared 1.4% last month as social benefit payments flowing from the government's massive economic stimulus package worked their way into the data. Excluding the impact of the stimulus package, disposable incomes rose a more humble 0.2%. Consumer spending during May rose 0.3% -- its first monthly increase since February.

The best news of all was found in the personal consumption expenditure index component of the report, a measure of inflation closely watched by the Fed. This gauge of inflation pressures at the consumer level rose a very modest 0.1% last month, its smallest monthly gain since records began in 1959. On a year-over-year basis the personal consumption expenditure index is up a very modest 1.8%.

The coming holiday shortened week will start off slow - but will end with a bang. The calendar is completely void of economic news until Wednesday morning's release of the Institute of Supply Management report on last month's activity levels in the nation's manufacturing sector. The current consensus among economists is that while activity probably improved during the month of May - it won't be high enough to suggest a recovery in the sector has begun in earnest.

On Thursday the Labor Department will release the June nonfarm payroll figures with most analysts anticipating a headline number showing a loss of 355,000 jobs as the national unemployment rate inches up to 9.6%.

Mortgage investors have already priced in these expectations so -- should the consensus estimates prove generally accurate -- the impact on the direction of mortgage interest rates will likely be negligible. In the unlikely event the Institute of Supply Management's index of manufacturing activity exceeds 45.5% and/or last month's job losses prove to be less severe than projected - mortgage interest rates will almost certainly creep higher into the Fourth of July weekend (the mortgage market will be closed on Friday, July 3^rd).

Thursday, June 25, 2009

The mortgage market got off to a nice little rallying start this morning following the Labor Department's announcement that the number of Americans filing first-time claims rose by an unexpected 15,000 during the week ended June 20^th. The four-week moving average of jobless claims, a value that smoothes out the volatility in the raw weekly numbers, rose a mere 500.

The true underlying health of the labor sector is a huge question in mortgage investors' minds. If the labor sector is really weaker than most now believe - the economy will sag further. In the convoluted world of credit markets a deteriorating labor sector tends to be supportive of steady to perhaps fractionally lower mortgage interest rates. On the other hand, if the labor sector is stronger than anticipated - with bankruptcies at General Motors and Chrysler Group together with normal model year retooling furloughs and standard end-of-the-year layoffs in the nation's schools creating a noticeable but temporary upward skew in the statistics -- the return to a steady-to-lower trending pattern of data in the labor sector would almost certainly put upward pressure on mortgage interest rates. Unsure which of these two scenarios will prove to be the most accurate - but I do know for a fact investors will be keenly attuned to this economic metric over the course of next three- to four-weeks for hints indicating a shift in the labor market trend.

In a separate report the government announced first-quarter Gross Domestic Product, a statistical measure of the value of all the goods and services produced within the country's borders, dropped at a 5.5% annual rate, after shrinking 6.3% in the fourth-quarter of last year and 0.5% in the third-quarter. The Commerce Department's original estimate of Gross Domestic Product was -6.1%, revised to -5.7% and then to the current -5.5% which will not be revised again. For reasons of their own, credit markets shrugged off the substantial quarter-over-quarter improvement embedded into today's measure of domestic economic activity. It is highly unlikely mortgage investors will continue to be so nonchalant should the second-quarter Gross Domestic Product figure show additional improvement. It will be another thirty-days or so before this particular issue rolls around again into such sharp focus -- the government will make public their initial estimate of second-quarter Gross Domestic Product performance on July 30^th.

Most observers believe today's 7-year note offering will be well bid by domestic and foreign investors alike. If so, this event will likely have little, if any noticeable impact on the trend trajectory of mortgage interest rates today. A poorly bid 7-year note auction, a condition that would require the government to offer yet higher yields to attract the required capital, will almost certainly cause disappointed mortgage investors to nudge rates fractionally higher.

Wednesday, June 24, 2009

Trading activity in the mortgage market is light this morning as investors pace the floor awaiting the results of today's record-setting $37 billion 5-year note auction (concludes at 1:00 p.m. ET). This big debt offering will be followed within roughly an hour by the much anticipated release of the post-meeting statement from the Federal Open Market Committee -- expected at 2:15 p.m. ET.

Most observers believe today's 5-year note offering will be well bid by domestic and foreign investors alike. If so, this event will likely have little, if any noticeable impact on the trend trajectory of mortgage interest rates today. A poorly bid 5-year note auction, a condition that would require the government to offer yet higher yields to attract the required capital, will almost certainly cause disappointed mortgage investors to nudge rates fractionally higher.

The likelihood the members of the Federal Open Market Committee will choose to leave their benchmark fed funds rate at zero following the conclusion of their meeting this afternoon is a virtual "no-brainer." Such an outcome is already priced into the mortgage market. Investors, however, will be firmly focused on the Fed's post-meeting statement for any hint the central bank intends to ramp-up their current authorization for the direct purchase of $1.25 trillion of agency mortgage-backed securities, $300 billion of Treasury debt obligations and $200 billion of the corporate debt obligations of Fannie Mae and Freddie Mac.

So far, the Fed has burned through roughly 50% of their current interest rate supporting direct-purchase "war chest." The majority of market analysts tend to believe the Fed will choose to make no change to the size of their direct-purchase checkbook this time around - preferring to take a "wait-and-see" approach -- before giving any real consideration to printing up another gargantuan batch of dollars to temporarily send interest rates in general, and mortgage interest rates in particular, a few basis points lower.

If this assessment proves accurate -- look for mortgage interest rates to drift fractionally higher for the balance of the week. In the unlikely case the Fed surprises the market place with the announcement of a notable expansion of their quantitative easing programs -- expect mortgage interest rates to slide incrementally lower from current levels.

On a different subject -- the Commerce Department reported this morning that new orders for long-lasting manufactured goods rose by a much-stronger-than-expected 1.8% in May - three times the 0.6% gain most economists had expected to see. New orders excluding transportation advanced 1.1% last month, well ahead of the consensus estimate for an improvement of 0.4%. In a separate report the Commerce Department said new home sales slipped 0.6% lower in May as the median sales price rose to $221,600 from the April level of $212,200. The Mortgage Bankers of America chimed in with their weekly index of loan applications -- which rose 6.6% during the week ended June 19 - after slowing to a pace not seen since last November. Purchase applications were up 7.3% while refinance applications increased by 5.9%. This collective body of data simply added to a growing collection of statistics suggesting the economy is stabilizing.

Mortgage investors are keenly aware that there is a big difference between an economy that is stabilizing -- and an economic recovery. Until/less the macro-economic data trends improve on a multiple month-over-month basis -- the upward pressure stronger-than-expected economic data will exert on the direction of mortgage interest rates will continue to be largely muted.

Monday, June 22, 2009

The prospect for notably lower mortgage interest rates has hit a wall-of-worry created by investors' jitters over this week's record amount of supply Uncle Sam plans to dump into the credit markets. The Treasury Department intends to sell $40 billion of 2-year notes on Tuesday, $37 billion of 5-year notes on Wednesday and $27 billion of 7-year notes on Thursday (for a total of $104 billion).

Investors will comb carefully through Wednesday afternoon's post-meeting statement from the Federal Open Market Committee. Market participants will consider carefully the Fed's guidance on growth and they will hunt diligently for any hint the central bank intends to expand its $300 billion program for the direct purchase of Treasury debt obligations.

Fed Chairman Bernanke and his fellow committee members will be walking a tight-rope as they craft the written statement of their view of the economy and their analysis of the appropriate blend of monetary and credit policy. The majority of economists see zero chance the Fed will raise its benchmark short-term fed fund rate as Mr. Bernanke and company simultaneously attempt to nurture hopes the end of the recession is near. The chances are high that the Fed's post-meeting statement will come off as a mixed message - especially to fixed-income investor investment community. These market participants are hyper-sensitive to the idea that improving economic activity leads to increased demand for capital - which in-turn leads to higher interest rates. In my experience, when investors are unsettled about a message from the Fed, they tend to take a "safe-rather-than-sorry" approach to their mortgage pipeline risk management strategies. In this case -- if history repeats itself -- look for mortgage interest rates to struggle to make any headway toward notably lower levels this week.

Worth repeating (From Friday's commentary - with update): The stock market's performance will almost certainly exert some influence on the direction of mortgage interest rates over the next five business days. Last week when stock prices retreated - mortgage interest rates crept incrementally lower - and when stock prices showed some strength -- mortgage rates edged higher. There is little reason to expect this relationship will be any different this week. As I pointed out in Friday's commentary from a technical perspective the Dow will likely find it very difficult to move above the 8800 mark (last week's intraday high was 8798) and the NASDAQ will find it challenging if not impossible to push through the 1865 or so mark (last week's intraday high was 1838). I see reason to believe the stock markets will begin to loose upward momentum during the Tuesday - Thursday time frame this week. If my assessment proves accurate weakness in the equity market will serve to mute some, but not necessarily all of the upward pressure this week's Treasury auctions will exert on the trend trajectory of mortgage interest rates.

Friday, June 19, 2009

The prospect for notably lower mortgage interest rates has hit a wall-of-worry created by investors' jitters over next week's record amount of supply Uncle Sam plans to dump into the credit markets. The Treasury Department intends to sell $40 billion of 2-year notes on Tuesday, $37 billion of 5-year notes on Wednesday and $27 billion of 7-year notes on Thursday (for a total of $104 billion). The upcoming note sales will top the previous record of $101 billion sold in auctions in late April and May.

The stock market's performance may also exert some influence on the direction of mortgage interest rates. This week when stock prices retreated - mortgage interest rates crept incrementally lower - and when stock prices showed some strength -- mortgage rates edged higher. There is little reason to expect this relationship will be any different next week. From a technical perspective, it appears that the Dow will likely find it very difficult to move above the 8800 mark and the NASDAQ will find it challenging if not impossible to push through the 1865 or so mark. There are reasons to believe the stock markets will begin to loose upward momentum during the Tuesday - Thursday time frame next week. If this assessment proves accurate weakness in the equity market will serve to mute some of the upward pressure the Treasury auctions will exert on the trend trajectory of mortgage interest rates.

The highlight of next week's calendar will be the Federal Open Market Committee meeting scheduled for Tuesday and Wednesday. In their post-meeting statement (expected at 2:15 p.m. Wednesday afternoon) the Fed will likely emphasize their intent to maintain their zero interest-rate policy for short-term interest rates for the foreseeable future and underscore their already announced plans to buy longer-dated Treasury obligations and mortgage-backed securities. It is highly likely Fed Chairman Bernanke and his fellow central bankers will go to great lengths to emphasize that the economy's rate of deterioration has declined substantially -- with preliminary signs of an end to the recession making timid appearances through a number of different economic metrics. In the end, the members of the committee will likely choose to leave both monetary policy and credit policy (direct-purchase authorizations) unchanged - with the latter decision almost sure to exert some modest upward pressure on mortgage interest.

Thursday, June 18, 2009

It is a familiar pattern.

Once again bond and mortgage-backed security prices are tumbling lower out-of-the-gate as primary dealers actively "cheapen-up" the credit markets in front of a deluge of new incoming supply from the government.

Next week, beginning on Tuesday and running through Thursday, Uncle Sam will be in the credit markets looking to borrow roughly $101 billion in the form of two-, five- and seven-year Treasury notes. As dealers scramble to make space in their already overflowing portfolios many find it necessary to sell parts of their existing stock of Treasury securities -- compounding the existing imbalance between supply and demand. As you well know-- when supply exceeds demand -- prices fall - and in our world when prices fall - interest rates rise.

The Labor Department reported this morning that first-time jobless benefit claims for the week ended June 13^th rose by 3,000. That particular snippet of macro-economic data was generally considered inconsequential as far as most mortgage-investors were concerned. Investors weren't so quick to wave off additional detail in the report that showed the number of people staying on the benefit rolls after collecting an initial week of benefits fell by 148,000, marking the first weekly improvement in this measure of labor market conditions since January. In another sign labor market weakness may be easing, the 4-week moving average for new claims, considered to be a better gauge of underlying trends because it smoothes out week-to-week volatility, dropped to its lowest level since February 14^th.

The initial jobless claims data did not independently create this morning's selling pressure - it just gave investors another reason not to buy.