Daily Commentary by Larry Baer: Virtually
all of the modest upward pressure on mortgage interest rates this morning has
been created by overnight news that Euro-zone leaders agreed to bend their aid
rules to shore up the banks and bring down the borrowing costs of financially
crippled members like Italy
and Spain.
The immediate "knee-jerk" reaction
by some credit market participants was to reverse some of their outstanding
"flight-to-quality" positions by selling Treasury debt obligations
and agency eligible mortgage-backed securities in the mistaken belief (in my
opinion) that today's agreement is a sign the financial leadership in the
euro-zone is adopting a more flexible approach to solving its two-year old debt
crisis.
In my judgment, today's agreement represents
nothing but one more poorly disguised attempt to buy extra time for the
underlying fiscal repair efforts together with structural reforms to show
results. As I write, the details of the
agreement have not been fully disclosed to the public - and the devil is always
in the details. If, as in the past 20
summits since the crisis erupted in early 2010, the structure of today's
strategy is deemed by credit market participants to have too many holes in it
to have any lasting effectiveness - the flow of global capital will quickly
return to the relative safe haven of U.S. dollar denominated assets like
Treasury debt obligations and agency eligible mortgage-backed securities. If so, the foundation for generally steady
mortgage interest rates here at home will remain firmly in place.
In other news of the day -- the Bureau of
Economic Analysis reported this morning consumer spending slipped 0.1% last
month - the first decline in this measure in 11 months. The decline in spending was almost completely
related to goods while service spending growth remained healthy. The decline in spending was a direct
consequence of continued weak income growth -- which managed to muster an
anemic 0.2% gain in May. Inflation
pressures at the consumer level remain very benign - the "core"
(excluding volatile food and energy prices) rate of the personal consumption
expenditure index rose a barely perceptible 0.1% during the reporting
period. The numbers fell within shouting
distance of market expectations rendering the whole thing of little, to no
consequence with respect to interest rate movement in today's mortgage market
trading action.
Looking ahead to the coming holiday shortened
week - Monday's June Institute of Supply Management Manufacturing Index,
Tuesday's May Factory Orders figures, Thursday's weekly jobless claims number
and June ISM Service Sector Index will all be sharply overshadowed by the
release of the June Nonfarm Payroll data on Friday morning. Your current rate sheets almost fully reflect
mortgage investors' expectation that the headline June Nonfarm Payroll figure
will post a puny 90,000 net new job gain number. The national jobless rate is expected to
remain unchanged at 8.2%. Only in the
highly unlikely event June Nonfarm Payrolls were to exceed 110,000 and/or the
national jobless rate posted a reading of 8.1% or less will mortgage investors
likely respond by pushing interest rates notably higher.
THE
MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
