Daily Commentary by Larry Baer: Yesterday's strong sell-off in the mortgage
market was created by a knee-jerk reaction to commentary included in the
minutes from the Federal Open Market Committee's December 11-12 meeting.
The trigger-point
for yesterday's heavy selling was language contained in the minutes suggesting
some members of the committee were growing hesitant about expanding the Fed's
massive $2.9 trillion balance sheet with additional purchases of Treasury debt
obligations and agency-eligible mortgage-backed securities. The
minutes of the meeting indicated several members of the committee thought it
would probably be appropriate to slow or stop purchases well before the end of
2013.
Interestingly enough
at the conclusion of that same December 12th meeting those same
members of the committee approved a post-meeting statement with language
stating the Fed would hold borrowing costs low "at least as long" as
the unemployment rate remains above 6.5% and inflation projections remain at
2.5% or below. Make note of those two values.
It is also worth
noting the Fed announced following their December meeting it was extending
monthly purchases of $40 billion in mortgage-backed securities and also buying
$45 billion in Treasuries each month.
The just
released December nonfarm payroll report showed the unemployment rate edged up
to 7.8% from the prior month's 7.7% while the core rate of inflation (as
defined by the consumer price index) has growing at a 1.8% annualized pace as
of November 2012.
I don't know about
you - but I don't see anything here that remotely suggests the Fed is closing
up their giant checkbook and going home anytime soon.
As a matter of fact
today's December nonfarm payroll report did nothing but confirm the economy is
at best continuing to muddle along. The headline payroll gain of 155,000
was inline with the average gain of 153,000 for the year. The moderate
pace of payroll growth was sufficient to bring down the unemployment rate for
the year 2012 from 8.5% to 7.8%.
Looking ahead most
economists are projecting the national jobless rate is likely to creep
fractionally lower from its current 7.8% level of today's report - to 7.6% by
year's end. The key point here is that it sure seems to me 7.6% is
a very long way form 6.5%.
While there is no
denying yesterday's relatively strong sell-off in the mortgage market - I don't
yet believe it is time to begin to expect progressively higher mortgage
interest rates to dominate.
It is my strong
belief from a technical perspective the stock markets are very vulnerable to a
fairly sharp downward correction - probably manifesting itself in the first
three days of the coming week. If my assessment is accurate, look for
capital to begin fleeing the stock markets for the relative safe haven of
Treasury debt obligations and agency-eligible mortgage-backed securities - a
condition that will likely prove to be supportive for steady to perhaps lower
rates and higher prices.
Looking ahead to the
coming week - the economic calendar will be exceptional light with Thursday's
weekly jobless claims report taking top billing. Uncle Sam will be in the
credit markets on Tuesday looking to borrow $32 billion in the form of 3-year
notes, $21 billion in the form of 10-year notes on Wednesday and $13 billion in
the form of 30-year bonds on Thursday.
THE
MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
