Commentary: This morning's rally in the mortgage market come almost entirely by way of a "flight-to-quality" buying spree created by a short-selling* ban on financial shares by France, Italy, Spain, and Belgium.
Many European investors are of the opinion that "where there is smoke - there is fire." Why would you put a ban on short sales of the stocks of banks and other major money-center institutions if there was nothing wrong? The good news is that the flow of capital out of Europe into the relative safe-haven of dollar denominated assets like Treasury debt obligations and mortgage-back securities is supporting the near-term prospects for steady to perhaps fractionally lower mortgage interest rates. The bad news is that this "flight-to-quality" support can be withdrawn as quickly as it appears. Expect more - not less - price volatility in the mortgage market in the next week or so.
This morning's flood of safe-haven seeking capital from Europe completely trumped what would have otherwise been mortgage interest rate unfriendly news from the Commerce Department. According the government U.S. retail sales posted their biggest gain since March last month, tempering fears the world's largest economy might be slipping back into recession. Overall sales climbed 0.5% in July, largely in line with most analysts forecast. Excluding autos, sales increased 0.5%, well above forecasts calling for a 0.2% gain. Year-over-year growth for ex. auto sales is now at its post-recession high. The fact that the July retail sales gains occurred during a period of weak job growth and falling consumer confidence did go unnoticed by most economists and more experienced mortgage investors.
Be very careful with your risk management strategies - there is a good chance today's rally in the mortgage market is based more on short-term illusion than long-term substance.
The coming week will be a rather quiet one with respect to major economic reports. Wednesday's 8:30 a.m. ET release of July Producer Price Index and Thursday's 8:30 a.m. ET release of the July Consumer Price Index will be the primary economic news stories of the coming week. These two measures of inflation pressures at the factory gate and at consumer's front door are both expected to be benign. If this assessment proves accurate, their respective impact on the current trend trajectory of mortgage interest rates will be virtually unnoticeable.
* A trade that involves selling an asset you don't currently own in hopes of buying that same asset at a lower price at some point in the future and pocketing the difference as profit.
THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
