Daily Commentary by Larry Baer

Daily Commentary by Larry Baer:  The yield on 7- and 10-year U.S. Treasury notes fell to new 60-year lows this morning as worries of contagion from Spain's ailing banks created another round of safe-haven buying among global investors.  Spain's financial woes, rising Italian borrowing costs and uncertainties over the Greek national elections scheduled for June 17^th sent global investors into another almost panicked "flight-to-quality" buying spree this morning.  

As if they weren't already worried enough about the health of the world economy - investors were further disturbed by this morning's news private payroll growth accelerated only slightly last month while weekly requests for government jobless benefits grew by a surprising 10,000 claims -- strong hints the recovery in the labor sector is approaching stall speed.  Other data this morning showed economic growth as measured by Gross Domestic Product was softer than any observers expected in the first quarter, with business restocking shelves more slowing than previously thought and government spending declining sharply.  

Today's battery of data on the economy and the job market comes ahead of tomorrow morning's 8:30 a.m. release of the May Nonfarm Payroll report.  The consensus forecast is calling for nonfarm payrolls to increase by 150,000, up from a measly 115,000 jobs in April.  Numbers that closely approximate the consensus estimate have already been priced into most of your mortgage investors' rate sheets and will probably have little, if any impact on the current level of mortgage interest rates.  

In the unlikely case the headline nonfarm payroll figure rises dramatically higher than projected -- and/or the jobless rate posts a reading less than 7.9% -- look for mortgage investors to react to the unsettling news by pushing mortgage interest rates upward before the end of the day.  

A softer-than-expected nonfarm payroll number (130,000 new jobs or less) will likely make the knees of investors the world over start to knock.  A second weak payroll number in a row combined with expanding downside risks in Europe has the potential to send global stock prices notably lower - an event should it occur - sure to directly benefit the prospects for steady to lower mortgage interest rates here in the states.  

In my judgment the mortgage market has already largely priced in expectations for another mediocre labor market report.  If my assessment proves accurate, look for any initial early rally attempt favoring higher prices and lower rates to fade noticeably by midday as investors move to book profits before the final bell sounds tomorrow afternoon.

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

Daily Commentary by Larry Baer 5.30.2012

Daily Commentary by Larry Baer:  The yield on 7- and 10-year U.S. Treasury notes fell to 60-year lows this morning as worries of contagion from Spain's ailing banks created another round of safe-haven buying among global investors.  Spain's financial woes, rising Italian borrowing costs and uncertainties over the Greek national elections scheduled for June 17^th sent global investors into an almost panicked "flight-to-quality" buying spree.  As if they weren't already worried enough about the health of the global economy -- news that U.S. pending homes sales unexpectedly fell 5.5% in April caused heavy selling in the stock markets  -- a condition that provided additional support to the current move to lower mortgage interest rates here at home.

In my judgment the reaction to this mornings 5.5% decline in the pending home sales number for April may be "overcooked" a bit.  Even with the slump in April -- the pending home sales index is 14.4% higher than in April 2011, which makes for 12 consecutive months of strong year-over-year gains.  Pending home sales are currently much higher in all regions on a year-ago basis - ranging from 5.0% in the West to 23% in the Midwest.  This index bears watching in coming months - but right now it appears to me the media is making more out of the April decline than is probably justified.  

Speaking of home sales - the Mortgage Bankers of America has released their Mortgage Application Survey for the week ended May 25^th. The mortgage application composite index (includes both purchase and refinance requests) declined 1.3% during the survey period.  Refinance requests were down 1.5% from the prior week but is still up 19% from the month ago mark and up 87.4% from this time one year ago.   Purchase application traffic is down 0.6% from a week ago, down 2.7% from four weeks ago and down 5.4% from this same time frame in 2011.  Refinance applications accounted for 76.6% of all applications and 75.1% of the current perspective loan volume.  

The contract rate for 30-year fixed rate conforming mortgages finished at 3.91%, down 2 basis points from the week ago level, down 14 basis-points from four-weeks ago and 77 basis-points from a year ago.

Mortgage investors will be looking for clues as to whether another interest rate friendly round of bond purchases from the Fed may be in the cards before the summer is over.  Thursday's 8:30 a.m. ET release of revised Q1 Gross Domestic Product figures together with Friday's May Nonfarm Payroll report will be key pieces of evidence.  If, as expected, first-quarter economic growth as represented by GDP posts a reading of 2.0% or more and May nonfarm payrolls hit 150,000 or so - the hope for more interest rate friendly bond purchases from the Fed will fade rather sharply.  In my judgment it will likely take a revised Q1 GDP number of 2.0% or less together with a May nonfarm payroll number of 125,000 or less to support the prospects for yet lower mortgage interest rates.  While such an outcome is certainly possible - at this juncture it does not appear to be very probable.    

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

Daily Commentary by Larry Baer 5.29.2012

Daily Commentary by Larry Baer:  Investors are slowly drifting back to their desks after the first three-day weekend of the summer.  There is really no hurry - all of the major economic news is back-loaded to the final two days of the week.

Mortgage investors will be looking for clues as to whether another interest rate friendly round of bond purchases from the Fed may be in the cards before the summer is over.  Thursday's 8:30 a.m. ET release of revised Q1 Gross Domestic Product figures together with Friday's May Nonfarm Payroll report will be key pieces of evidence.  If, as expected, first-quarter economic growth as represented by GDP posts a reading of 2.0% or more and May nonfarm payrolls hit 150,000 or so - the hope for more interest rate friendly bond purchases from the Fed will fade rather sharply.  In my judgment it will likely take a revised Q1 GDP number of 2.0% or less together with a May nonfarm payroll number of 125,000 or less to support the prospects for yet lower mortgage interest rates.  While such an outcome is certainly possible - at this juncture it does not appear to be very probable.    

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

Weekly update by Larry Baer 5.28.2012

Market Commentary: The upcoming holiday shortened weak will be governed by continuing concerns over a possible Greek exit from the euro. Investors are not really so anxious about the impact a single country exit will have – they are biting their nails worrying but the “black swan effect” (unexpected consequences) such an event could have on the global economy.

Nervousness about Greek’s upcoming elections on June 17th and deepening stress levels in the banking sectors of Europe are keeping the fires of demand for safe-haven assets like Treasury debt obligations and mortgage-backed securities burning brightly. As long as this phenomenon dominates the credit markets -- a key pillar holding mortgage interest rates at, or near historical lows will remain firmly in place.

The entire battery of late-week macro-economic data will draw significant focus from mortgage investors -- but the most intense spotlight will be reserved for Friday’s employment data for May.

While the vast majority of market participants are expecting the Labor Department to report 150,000 or more new jobs were created in May -- a softer-than-expected nonfarm payroll number (130,000 new jobs or less) will likely make the knees of investors the world over start to knock. A second weak payroll number in a row combined with expanding downside risks in Europe has the potential to send global stock prices notably lower – an event should it occur – sure to directly benefit the prospects for steady to lower mortgage interest rates here in the states.

Daily Commentary by Larry Baer 5.25.2012

Daily Commentary by Larry Baer:  The few traders still at their desks this morning are putting the finishing touches on their risk management strategies in front of next week's potential price volatility.  

Mortgage investors will focus on the upcoming back-loaded economic calendar for clues as to whether another interest rate friendly round of bond purchases from the Fed may be in the cards before the summer is over.  Thursday's 8:30 a.m. ET release of revised Q1 Gross Domestic Product figures together with Friday's May Nonfarm Payroll report will be key pieces of evidence.  If, as expected, first-quarter economic growth as represented by GDP posts a reading of 2.0% or more and May nonfarm payrolls hit 150,000 or so - the hope for more interest rate from the Fed will fade rather sharply.  Under this condition mortgage interest rates will almost certainly creep higher.  In my judgment it will likely take a revised Q1 GDP number of 2.0% or less together with a May nonfarm payroll number of 125,000 or less to support the prospects for yet lower mortgage interest rates.  While such an outcome is certainly possible - at this juncture it does not appear to be very probable.    

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

Daily Commentary by Larry Baer 5.25.2012

Daily Commentary by Larry Baer:  The slight upward pressure on mortgage interest rates this morning is being created almost exclusive by concerns investors have with regards to this afternoon's sale of $29 billion worth of 7-year notes by the Treasury Department.  Demand for the notes may be tested by their low yield, which earlier this morning touched 1.128%.  In my judgment, much of the "flight-to-quality" buying spree related to the European debt crisis has probably run its course.  Credit market investors live in the future - not the present.  Unless events in the euro-zone unfold in some currently unforeseen manner -- it is unlikely capital will continue to cascade into U.S. dollar denominated assets like Treasury debt obligations and agency mortgage-backed securities as it has in weeks past.  Yields can only fall so far before investors begin to feel compelled to look elsewhere for a "bigger-bang-for-their-buck."  A weak 7-year note auction today will tend to nudge mortgage interest rates fractionally higher.  My personal opinion is the investment community will exhibit strong enough demand for today's offering to prevent any noticeable shift in mortgage interest rates - but subsequent sales will likely require Uncle Sam to "sweeten-the-pot" by bumping up yields - a event, should it occur, almost certain to push mortgage interest rates higher as well.  Today's debt sale will conclude at 1:00 p.m. ET and I'll post the result on my website as soon as possible thereafter.

Initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 370,000 during the week ended May 19^th according to Labor Department figures released earlier this morning.  Claims have barely budged in the past four weeks indicating a marginal improvement in the pace of job creation after April's disappointing 115,000 gain in the broader nonfarm payroll figure.  

In a separate report the Commerce Department said durable goods orders (items manufactured to last three years or more) rose 0.2% in April after dropping 3.7% in March.  While the headline figure for the April Durable Goods Orders was stronger than expected - the details of the report suggest the manufacturing sector, other than autos, will probably be lethargic for much of the summer.  Excluding transportation, orders fell 0.6%.  Business spending plans fell 1.9% after dropping 2.2% the prior month.  It looks more and more like business are hesitating to invest in face of the uncertainties in the U.S. and global economy.  

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