Daily Commentary by Larry Baer 5.26.2011

Commentary: Mortgage interest rates are creeping a touch lower this morning on news the government did not upwardly revise its first-quarter estimate of economic growth as most observers had been anticipating. Adding to the mortgage market friendly tone of today’s economic news was a report from the Labor Department that showed a surprise jump in the number of American’s standing in line to file first-time claims for jobless benefits.

Most economists had been anticipating economic activity had ramped up to a 2.2% rate of growth in the first three-months of the year from the initial government estimate of 1.8%. The upcoming third revision of this data next month will likely do nothing more than confirm the first three months of 2011 were exceptionally weak, as higher oil prices and severe weather sapped the budding strength that was developing as 2010 came to an end.

In a separate report, the Labor Department said weekly jobless claims rose 10,000 to 424,000 during week ended May 21^st. Requests for unemployment benefits have remained above 400,000 for seven straight weeks after falling to a three-year low of 375,000 in mid-February. Unless/until weekly jobless claims fall below 400,000 on consistent basis it is highly unlikely the nation’s massive unemployment issue will show any improvement.

Boiling all this economic mumbo-jumbo down to its bare essence here’s the story -- as long as economic growth remains weak – the demand for capital will remain weak -- and that is a condition that will likely be supportive of the prospects for steady to perhaps fractionally lower mortgage rates. That’s the good news. The bad news is that slow economic growth doesn’t do much for loan demand – even though rate sheets will remain pretty attractive as we hit mid-year.

Domestic and foreign investor demand for longer-dated Treasury debt will be tested for the final time this week as the government looks to sell $29 billion of 7-year notes at auction this afternoon. The sale of $35 billion of 2-year notes on Tuesday and $35 billion of 5-year notes on Wednesday were met with solid demand. There is a saying in the capital markets that says, “Two good government debt auctions in a week tend to spoil the third”. Worries the economic recovery could be stalling together with the return of global debt concerns from Europe may be just enough to allow Uncle Sam to go three --for -- three this week. If so, a strong 7-year note auction this afternoon will tend to be supportive of steady to perhaps fractionally lower rates. I’ll post the auction result on my website as soon as possible once the final gavel falls at 1:00 p.m. ET.

THE MARKET IS ALWAYS RIGHT! … YOU AND I ARE SOME OF THE TIME