Daily Commentary by Larry Baer 10.31.2012

Daily Commentary by Larry Baer:  If this run-up to the presidential election follows prior precedent - look for trading activity in the mortgage market to tighten up - with the battle between buyers and sellers producing little in the way of significant movement in terms of note rates until the election results are deemed finalized and official.  Even an off-of-the charts headline nonfarm payroll number (170,000 new jobs or more) will not likely create a correspondingly explosive upward move for mortgage interest rates.  Note that I'm not saying a strong improvement in the labor picture on Friday won't put some upward pressure on rates - I'm just saying any upward pressure will be mitigated to a fairly significant degree by investors' reduced appetite for risk in front of a major national election.

Mortgage investors will be keeping one eye on the damage estimates from Hurricane Sandy.  The storm is expected to go into the record books as one of the biggest storms ever to hit the United States.  Sandy's sheer breath - 10 states have declared a state of emergency - means it will likely take a toll on this quarter's domestic economic growth - even if the long-term impact ultimately proves neutral.   While the impact on those people individually affected by the storm may be long lasting and more than worthy of our thoughts and prayers - the blow to the national economy will almost certainly be short-term.  From the cold, hard perspective of the capital markets - Hurricane Sandy will support the near-term prospects of steady to fractionally lower mortgage interest rates -- but that support will fade rapidly as recovery and rebuilding kicks off in a big way during the first three months of 2013.

Mortgage investors shrugged-off the Q3 Employment Cost Index figures released by the Bureau of Labor earlier this morning.  Employer cost rose 0.4% during the three months from July through September, a miniscule drop compared to the prior quarter's 0.5% increase.  The major take-away for traders from this report is that wage pressures are still minimal - a confirming signal that wage-benefit inflation pressures remain benign.  The wage and benefit bargaining power of employees will not return until there is a sustained improvement in hiring - and that is a condition not expected to occur for several more quarters. 

As they do every Wednesday, the Mortgage Bankers of America have released their Mortgage Application Survey figures for the week ending October 26^th.  A fourth consecutive decline in refinance applications dragged the overall index down 4.8% from the prior week.  The number of purchase applications improved a meager 0.5% for the period.  Refinance applications accounted for 80% of all applications taken and 77% of the prospective loan volume for the week. 

The contract rate for 30-year fixed rate conforming mortgages rose by 2 basis points to 3.65%.  The interest rate is 12 basis-points higher than four weeks ago, but still 66 basis-points lower than the year-ago mark. 

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

Daily Commentary by Larry Baer 10.29.2012

Daily Commentary by Larry Baer:  The Securities Industry and Financial Market Association - the governing body for fixed-income securities like Treasury debt obligations and mortgage-backed securities has directed that all trading of U.S. dollar-denominated securities end at 12:00 noon ET as Hurricane Sandy bears down on the east coast.  Immediately following the announcement there was a little flurry of "flight-to-quality" buying of agency eligible mortgage-backed securities but trading volume has now tampered off dramatically.  When the market will reopen is still undetermined. 

The approaching "Frankenstorm" has already forced U.S. stock markets to close.

Mortgage investors shrugged off news earlier this morning indicating personal income and spending edged higher in September since the personal consumption index component of the report, the Fed's favorite measure of inflation at the consumer level, posted a very benign 0.1% gain.

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

Daily Commentary by Larry Baer 10.26.2012

Daily Commentary by Larry Baer:  The first-estimate of economic growth for the third-quarter indicted a late burst in consumer spending offset the first cutbacks in investment in more than a year by cautious businesses. 

Gross Domestic Product, a number intended to represent the value of all goods and services produced in the nation, expanded at a 2.0% annual rate during the third-quarter according to data compiled by the Commerce Department.  The third-quarter gain was a substantial improvement over the second-quarter's pace of 1.3%. 

One reason GDP came in a bit stronger than most analysts were expecting was due to the strength in federal government expenditure. According to BNP Paribas economists, what really was going on here was an increase in defense maintenance costs, which in fact was estimated by the government; which dramatically increases the probability this data will be revised downward in the future.  Government spending accounted for 0.7% of the third-quarter GDP growth.  Most experienced mortgage investors were quick to discount the apparent surge in third-quarter economic activity as unsustainable rendering what would have otherwise been a potentially mortgage interest rate unfriendly report toothless.

Looking ahead to next week -- Monday's Personal Income and Spending Report for September and Friday's October Nonfarm Payroll report will book-end an otherwise lightly populated economic calendar.   Mortgage investors have already priced in benign income and spending data and are largely anticipating Friday's employment report will show the economy created 125,000 new jobs while the national jobless rate ticked higher to 7.9% from September's 7.8% mark.  If these assessments prove accurate, the macro-economic news will tend to supportive of steady mortgage interest rates. 

In the run-up to Friday's nonfarm payroll report the trend trajectory of mortgage interest rates will be most influenced by trading action in the stock markets.  Higher stock prices will tend to drag rates higher while falling stock prices are almost certain to prove supportive of the prospects for steady to perhaps fractionally lower mortgage interest rates. 

The Dow is testing the very strong support at, or very near the 13,000 level (as I write the Dow is trading at 13,054) *.   As I first mentioned in Monday's commentary I think it is likely a downward breach of the support at or very near 13,000 opens the door for a drop into the 12,400 range before sellers might consider taking a brief pause to catch their breath.  I currently believe the near-term prospects for further downward movement in the Dow is limited - but should such a scenario actually develop -- the likelihood mortgage rates will move lower from current levels is strong. 

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

Daily Commentary by Larry Baer 10.25.2012

Daily Commentary by Larry Baer:  The Treasury Department will sell $29 billion of 7-year notes at auction today.  The final gavel will fall at 1:00 p.m. ET.  These notes should draw a solid bid from investors.  I don't think there is much to worry about here in terms of this event negatively impacting the current level of mortgage interest rates. 

The effect of this morning's two economic reports on the mortgage market has been muted as well. 

The number of orders placed with nation's manufacturers for Durable Goods - items built with an expected useful life of 3-years or more - climbed 9.9%.  As with most reports, the devil is in the detail - and in this case the news wasn't nearly as good as the headline might otherwise suggest.  The lion's share of the September increase in durable goods orders came from a rebound in the bookings for commercial aircraft.  If the transportation component is stripped out - durable goods for everything from toasters to x-ray machines rose a much smaller 2.0% -- signaling future activity in the manufacturing sector will not be a major contributor to overall domestic economic growth anytime soon.   Many economists believe companies are holding back placing new orders due to fears Congress could fail to avert the looming "fiscal cliff" of sharp tax hikes and massive government spending cuts scheduled to take effect at midnight on December 31^st - an event if left unchecked - almost certain to send the economy back into recession.

In a separate report, the Labor Department said initial claims for government unemployment benefits dropped 23,000 during the week ended October 20^th to a seasonally adjusted 369,000.  After smoothing out the week-over-week gyrations, the data shows the overall level of jobless claims is little changed from the end of the summer.  A rising tide of news regarding a developing global economic slowdown and the approaching U.S. national elections has sent many businesses to the sidelines with their hiring plans in their back-pockets to wait to gain more clarity about growth prospects and likely governmental policies before thinking about adding headcount to existing payrolls.

Trading action in the stock markets will once again likely prove to be the strongest single determinant influencing the trend trajectory of mortgage interest rates for the balance of the week   Higher stock prices will tend to drag rates higher while falling stock prices are almost certain to prove supportive of the prospects for steady to perhaps fractionally lower mortgage interest rates. 

*The Dow is testing the very strong support at, or very near the 13,000 level (as I write the Dow is trading at 13,064).   As I mentioned in Monday's commentary I think it is likely a downward breach of the support at or very near 13,000 opens the door for a drop into the 12,400 range before sellers might consider taking a brief pause to catch their breath.  Should such a scenario actually develop -- the likelihood mortgage rates will move lower from current levels is strong.  That is the good news part of this story.  The bad news is the psychological impact a stock market tumble of this magnitude would have on prospective borrowers will probably result in reduced loan demand even in the face of steady to lower mortgage interest rates.

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

Daily Commentary by Larry Baer 10.24.2012

 Daily Commentary by Larry Baer:  The Treasury Department will sell $35 billion of 5-year notes at auction today.  The final gavel will fall at 1:00 p.m. ET.  These notes should draw a solid bid from domestic and foreign investors alike.  If so, this event will probably prove to be supportive of steady mortgage interest rates.

With the presidential election only two weeks away most mortgage investors expect the Federal Open Market Committee will finish two day's of monetary policy strategy talks very quietly.  The committee will issue its traditional post-meeting statement at 2:15 p.m. ET this afternoon.  Look for this document to offer little, if any substantive change to current monetary policy.  The committee will likely give a nod to recent signs of improvement in the labor and housing sectors, but will quickly add that the glimmers of a stronger recovery are too few and too far between for policymakers to consider any changes to its current course of action.

New U.S. single-family home sales surged higher by a much stronger-than-expected 5.7% in September according to data released earlier this morning by the Commerce Department.  It was the fastest pace of sales since April 2010, when sales were boosted by a tax credit for first-time homebuyers.  Compared to September of last year, new home sales were up 27.1%.  A lack of jobs and strict lending conditions still pose significant hurdles to a more pronounced rebound in this sector of the economy - conditions highlighted by this week's Mortgage Application Survey from the Mortgage Bankers of America. 

According to the MBA significant declines in demand for both refinance and purchase-money mortgages drove the composite index down by 12% during the week ended October 19^th.  The number of purchase-money applications taken plummeted by 8.3% while demand for refinances fells by 12.9% on a week-over-week basis.  Refinance applications account for 80.9% of all applications taken last week and 78.3% of the prospective loan volume.  The contract for 30-year fixed-rate conforming mortgages rose by 6 basis-points to 3.63%.  The interest rate is unchanged from four-weeks ago, yet 70 basis-points lower than the year-ago level.

Trading action in the stock markets will once again likely prove to be the strongest single determinant influencing the trend trajectory of mortgage interest rates this week.  Higher stock prices will tend to drag rates higher while falling stock prices are almost certain to prove supportive of the prospects for steady to perhaps fractionally lower mortgage interest rates.  The Dow is testing the very strong support at, or very near the 13,000 level (as I write it is trading at 13,108).  As I mentioned in Monday's commentary I think it is likely a downward breach of the support at 13,000 opens the door for a drop into the 12,400 range before sellers might consider taking a brief pause to catch their breath.  Should such a scenario actually develop -- the likelihood mortgage rates will move lower from current levels is strong.  That is the good news part of this story.  The bad news is the psychological impact a stock market tumble of this magnitude would have on prospective borrowers will probably result in reduced loan demand even in the face of steady to lower mortgage interest rates.

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