Daily Commentary by Larry Baer 7.31.2012

Daily Commentary by Larry Baer:   Different day - same story.  

The Federal Open Market Committee meets today and tomorrow.  The European Central Bank and the Bank of England meet on Thursday.  

Of the three, Thursday's ECB meeting probably packs the most "punch" with respect to its potential impact on the current trend trajectory of mortgage interest rates here at home.  

Fed Chairman Bernanke and his fellow committee members are not expected to take any meaningful policy action this time around - waiting at least until their September meeting before considering launching another round of economic stimulus.     

Last week Thursday European Central Bank President Mario Draghi publically pledged to do whatever it takes within the ECB's mandate to preserve the euro.  He went on to say, "And believe me, it will be enough."   Intentionally or not, Mr. Draghi has raised expectations for bold, aggressive action from the European Central Bank sooner rather than later.  

Global investors will be unforgiving if the ECB chief does not add anything of substance on Thursday to his dramatic promise made the previous week.  Against such a backdrop stock prices will likely fall as domestic and global investors alike intensify their purchases of safe-haven assets like Treasury debt obligations and agency eligible mortgage-backed securities - a condition, should it develop, that will obviously be very supportive for the prospects of steady to perhaps fractionally lower mortgage interest rates on Main Street, USA.

On the other hand, should Draghi comes through with something of substance, his plan will probably include substantial cuts to short-term interest rates combined with large bond purchases by the European Central Bank - in essence their version of the Fed's quantitative easing program.  The initial kneejerk reaction of investors may continue to prove supportive of steady to perhaps fractionally lower mortgage interest rates for a day or so -- but it probably won't take long for increasingly large amounts of European capital currently "parked" in low yielding U.S. dollar denominated assets to begin a migration back into higher yielding asset classes elsewhere on the globe.  When (notice I didn't say if) this process begins in earnest, the lowest U.S. mortgage interest rates in modern recorded history will have been set and the slow but methodical march to higher mortgage interest rates will have begun.  I'm not suggesting all of this will transpire by Thursday afternoon - I am just pointing out the fact it is inevitable the refinance music is going to stop -- and those who are prepared -- will easily grab a seat on the purchase money bandwagon.

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

Daily Commentary by Larry Baer 7.26.2012

Daily Commentary by Larry Baer:  The most noteworthy event of the day in terms of its impact on the current trend trajectory of mortgage interest rates came from comments European Central Bank President Draghi made to an investment conference in London to mark the beginning of the Olympics.  Draghi told his audience -- and by extension the global investment community -- ". the European Central Bank is ready to do whatever it takes to preserve the euro.  And believe me, it will be enough."  

The reason I bring this event to your attention is that Mr. Draghi rode to the rescue in a similar manner and at a similar moment of major stress for euro-zone countries back in late December of last year.  The Central Bank launched a program that eventually pumped more than 1 trillion euros into the area's cash-strapped banks - a strategy that all but dried up the "flight-to-quality" buying of U.S. dollar denominated assets like Treasury debt obligations and agency-eligible mortgage-backed securities for roughly three months or so.  

The "so what" factor is pretty significant.  Within 30-days of the beginning of the European Central Banks intervention - the price of agency eligible mortgage-backed securities here in the states began a six-week slide that erased roughly 400 basis-points from investors' rate sheets for agency-eligible mortgage-backed securities.

As I am sure you are keenly aware -- mortgage interest rates have been powered to the lowest levels in modern recorded history largely on the safe-haven flow of capital out of sovereign debt strapped Europe.  The primary motivation for foreign investors transferring their capital to dollar denominated assets has not been based on a particularly enthusiastic perception of value - but rather on the pure desire for preservation of investment principal.   If/when this primary pillar supporting the prospects for steady to perhaps fractionally lower mortgage interest rates on Main Street begin to show signs of erosion -- it won't likely take long before mortgage investors begin shoving rates notably higher.  I'll keep you posted on this developing story.  

The number of Americans filing new claims for government jobless benefits fell 35,000 to a near four-year low last week.  The prior week the Labor Department reported initial jobless claims exploded upward by 36,000.  A Labor Department official told reporters, "Our data has been quite volatile lately."  My, my, my -- where would we all be without this depth of insight from the government?  

The real reason these weekly glimpses at labor market conditions have been "all-over-the-board" for the past two or three weeks is that automakers are carrying out fewer temporary plant shutdowns, throwing off the model the Labor Department uses to smooth the claims data for typical seasonal patterns.  It will be several more weeks before the claims data is free of unusual seasonal swings.  It will likely be mid-August before most mortgage investors assign higher levels of creditability to this data set.

In a separate report the Commerce Department said new orders for long-lasting U.S. manufactured goods rose 1.6% in June - higher than most observers had expected as a result of a strong surge in aircraft orders.  Factoring out transportation, new orders dropped 1.1%.  

Today's collective economic news did nothing to change the broadly held view among credit market participants that the economy is barely managing to register a heartbeat.  

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

Daily Commentary by Larry Baer 7.25.2012

Daily Commentary by Larry Baer:  The Commerce Department reported earlier this morning the pace of new home sales in June fell by the most in more than a year.  New Home sales tumbled 8.4% -- marking its largest monthly decline since February 2011.  The new home sales figure for May was revised higher by 13,000 units - which took a little of the sting out of the otherwise poor showing for June.  This data continues to reinforce the broadly held view among mortgage investors that housing continues to be challenged by high unemployment and stringent lending conditions.  While the June new home sales figure was notably softer than had been expected - the reaction in the credit markets was muted as participants are become increasingly calloused to one more report falling in line with an already long-running string of very weak economic numbers.  

As they do every Wednesday, the Mortgage Bankers of America have released their Mortgage Application Survey figures for the week ended July 20^th.  Overall mortgage application activity rose 0.9% for the period - driven by a 1.8% increase in refinance requests.  In contrast, the number of requests for purchase-money mortgages declined by 3.2% on a week-over-week basis.  Refinance applications accounted for 80.8% of all applications and 79.4% of the prospective loan volume.

The contract rate for 30-year fixed-rate conforming mortgages finished at 3.74%, unchanged from the prior week but down 14 basis-points from the month-ago mark and down 88 basis-points from this time one-year ago.

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

Daily Commentary by Larry Baer 7.23.2012

Daily Commentary by Larry Baer:  Concerns are mounting that Europe's debt crisis is worsening while U.S. economic growth is rapidly approaching stall speed.  These two issues have combined to fuel another solid round of "flight-to-quality" buying of Treasury debt obligations and agency-eligible mortgage-backed securities this morning.   All of this hand-wringing in the credit markets creates the perfect foundational support for the near-term prospects for steady to perhaps fractionally lower mortgage interest rates from your investors.

Looking ahead to the balance of the week -- Uncle Sam will be in the credit markets from Tuesday through Thursday conducting a three-part, $99 billion, debt auction.  First on the auction block tomorrow will be $35 billion of 2-year notes, followed by $35 billion of 5-year notes on Wednesday.  The auction series will conclude on Thursday with the sale of $29 billion of 7-year notes.  All three offerings are expected to be well bid.  If so, the coming auctions will probably exert little, if any noticeable influence on the current trend trajectory of mortgage interest rates.  

In terms of economic news Wednesday's release of the June New Home Sales figures, Thursday's initial weekly jobless claims report and Friday's first estimate of the second-quarter economic growth rate will be the featured numbers of the week.   All three reports are broadly expected to be weak - a condition that is already priced into most of your mortgage investors' rate sheets.  

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

Daily Commentary by Larry Baer 7.20.2012

Daily Commentary by Larry Baer:  Trading activity is light in the mortgage market this morning.  My sources tell me the majority of buying interest is being driven by foreign investors looking for a safe place to park money on renewed worries about the deepening euro zone fiscal mess.

The European Central Bank announced earlier today Greek government bonds will not be ineligible for member banks to use as collateral to borrow from the ECB effective next week Wednesday.  Nervousness created by this announcement spawned a wave of new capital flowing into dollar denominated U.S. debt obligations, agency eligible mortgage-backed securities and other low-risk asset classes.  Adding to the demand for these safe-haven investments are nagging concerns about signs of a sharp slowdown in both the U.S. and global economies.

All this hand-wringing creates the perfect foundational support for the near-term prospects for steady to perhaps fractionally lower mortgage interest rates from your investors.

Looking ahead to the coming week Uncle Sam will be in the credit markets from Tuesday through Thursday conducting a three-part, $99 billion, debt auction.  First on the auction block on Tuesday will be $35 billion of 2-year notes followed by $35 billion of 5-year notes on Wednesday and concluding on Thursday with the sale of $29 billion of 7-year notes.  All three offerings are expected to well bid.  If so, the coming auctions will probably exert little, if any noticeable impact on the current trend trajectory of mortgage interest rates.  

In terms of economic news Wednesday's release of the June New Home Sales figures, Thursday's initial weekly jobless claims report and Friday's first estimate of the second-quarter economic growth rate will be the featured numbers of the week.   All three reports are broadly expected to be weak - a condition that is already priced into most of your mortgage investors' rate sheets.  

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