Daily Commentary by Larry Baer: The private Institute
of Supply Management's
service sector index posted a reading of 56.0% in February - a notable and
surprising improvement from January's mark of 55.2%. The service industry
makes up almost 90% of the economy. February's improvement was driven by
a gain of 3.8% for new orders while orders for exports rose to their highest
level since May 2007, with the gauge climbing to 60.5% from January's reading
of 55.5%. The employment component of the service sector index weakened
slightly last month, edging down to 57.2% from the January mark of 57.5%.
This morning's
better-than-expected Institute
of Supply Management Service Sector Index
figures spawned a rally in the stock markets that has pushed the Dow Jones
Industrial Average Index to a new record high of 14,286 (as I write). A
rebound in corporate profits generated by massive cost cutting, particularly in
terms of labor costs, the lowest interest rates in modern history, and more
than $2.3 trillion in stimulus from the Fed have fueled a stock market recovery
from the March 2009 low of 6,547.
While new record
highs are nice - I think it is important to remember a huge part of the fuel
behind this rally to all-time new highs has been provided from the Fed - the
same Fed that promises this fuel will be throttled back when the national
jobless rate drops to 6.5% and/or the rate of inflation as measured by the
consumer price index exceeds 2.5%. Any sign from the Fed that even hints
Fed Chairman Bernanke and his fellow central bankers might be realistically
planning to take the fiscal stimulus punch bowl away carries a very high
probability of igniting a major sell-off in stocks.
A sell off in stocks
generally tends to be supportive of the prospects for steady to fractionally
lower mortgage interest rates. This time around things may be
significantly different. Mortgage interest rates have been a direct
beneficiary of the Fed's massive buying of Treasury debt obligations and agency
mortgage-backed securities since the Fed first started pumping money into
economy with their initial quantitative easing program in December of
2008.
When (noticed I did
not say if) the Fed begins to curtail their stimulus programs - a major support
behind mortgage interest rates achieving and essentially maintaining historical
modern day lows will fade rapidly. I am not suggesting the risk
exists this afternoon - I am however encouraging you, and by extension your
borrowers, to avoid the temptation to assume mortgage interest rates cannot
rise in the face of a significant sell-off in the stock markets.
Since both the stock
market and the mortgage market have been "juiced" by the Fed for
several years - the inevitable return to more normal levels will happen pretty
quickly once the Fed's treatment regime of printing money to inject
intravenously into the economy comes to an end. The first year or
two of the return to "normal" is not likely going to be normal - but
something far less than normal. Rest assured both markets will ultimately
achieve their natural levels - but not before putting all of us through a
series of wild whip-saw price moves. I'm not out to rain on
anybody's parade -- and I may admittedly be way off base here - but if I'm not
- it is definitely time to "make-hay-while-the-sun-shines" with the
best mortgage interest rates we will all likely see for sometime to come.
Looking ahead to
Friday -- mortgage investors have already priced-in expectations for a February
headline jobs number of 165,000 and a national jobless rate holding steady at
7.9%. If the actual numbers match or closely approximate the consensus
estimate -- this report will have little, if any, noticeable impact on the
trend trajectory of mortgage interest rates. A headline nonfarm payroll
number greater than 170,000 and/or a national jobless rate of 7.8% or less is
almost certain to push mortgage rates higher. While a
stronger-than-expected February payroll report is possible - at this juncture
it is not deemed to be very probable.
THE
MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
