Commentary: The "flight-to-quality" buying of Treasury debt obligations and mortgage-backed securities that supported the prospects of steady to fractionally lower mortgage rates since last week Thursday has now been completely unwound.
Investor concerns the Egyptian political turmoil and civil unrest would spread to other countries in the oil-rich Middle East have largely subsided - which means global capital is once again flowing in the direction of riskier but higher yielding assets. Unless/until civil unrest in the Middle East escalates to the point of war global investors will likely largely ignore the political convulsions currently engulfing Egypt. If my assessment proves accurate, the prospects for steady to fractionally lower mortgage interest rates supported by global capital participating in a major "flight-to-quality" buying spree of dollar denominated assets will remain dim.
The Institute of Supply Management's January Manufacturing Index added to the upward pressure on mortgage interest rates this morning. The ISM reported that manufacturing activity posted strong gains last month as the index moved to 60.8% -- well above the December level of 58.5%. The data provides strong evidence that the recovery in the manufacturing sector of the economy continues to accelerate. The details were solid, new orders rose 5.8% while the employment index gained 2.8%. The report did show that price pressures are beginning to build at the factory gate -- but so far it looks as though those cost increases are going to eat into manufacturers' profits rather than be passed-through to the consumer as pricing power remains weak for retailers.
Yet to come this week - Thursday's Institute of Supply Management's Service Sector report to be followed by the release of the January nonfarm payroll figures on Friday morning. The ISM service sector index is expected to post a very modest 0.1% month-over-month gain. Is so, it won't be a factor in terms of influencing the direction of mortgage interest rates and will easily be overshadowed by the jobs number on Friday. As I write most investors anticipate the economy created 150,000 more jobs in January than were lost -- while the national jobless rate is expected to tick up to 9.5% from December's 9.4%. Numbers that match or fall below these projections will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates. In the unlikely case the actual numbers are stronger than currently projected -- look for your investors to push mortgage rates higher.
THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
