The coming week's economic calendar doesn't offer much of substance for mortgage investors to chew-on during the coming four-day holiday shortened trading sessions.  There are no scheduled government debt auctions and members of the Federal Open Market committee have entered their "period of silence" in front of their two-day meeting next week. 

It is likely mortgage investors will take at least a passing glance at Thursday's December Leading Economic Index presented by the private Conference Board.  The Conference Board's Leading Indicator Index is intended to forecast likely economic conditions three to nine months in the future.  If, as expected, the index posts a gain of 0.7% or higher, it will have fully reversed the decline seen during the Great Recession - a condition that will almost certainly exert some upward pressure on mortgage interest rates. 

With nothing else to capture their attention during the run-up to Thursday's release of the Leading Economic Index - look for mortgage investors to take their interest rate directional cues from trading activity in the stock markets.  Rising stock prices will tend to drive mortgage interest rates higher -- while falling stock prices will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates.

 
 
Uncle Sam will be wading into the credit markets this week looking to borrow a total of $84 billion dollars.  He'll kick-off his four-part borrowing spree by warming up with today's $10 billion 10-year inflation-index security sale before really hitting his stride with tomorrow's $40 billion 3-year note auction followed by Wednesday's sale of a $21 billion stack of 10-year notes.  He'll wrap the whole thing up on Thursday with the sale of $13 billion worth of 30-year bonds.   

Investors remain unsure whether the economic recovery glass remain half-full - or half empty - so this big round of government supply will likely churn the credit market up a bit.  Even so, when the auction totals are finally tallied -- demand for each of these government debt offerings will probably prove to have been strong enough to support steady to perhaps fractionally lower mortgage interest rates.

 
 
With nothing in the way of new macro-economic data to guide them, mortgage investors much decide whether to lock in some profits before the trading day comes to an end – or stick with the rally in hopes that it produces more upside gains before the early close for the Christmas Holiday next Thursday.  Look for trading action to become increasingly spasmodic as traders focus on making sure profits are safely registered “on-the-books” and as they put the final touches on their year-end positions.  The likelihood that anyone will be aggressively adding large risk positions to their portfolio is small – limiting the potential for a notable move to yet lower mortgage interest rates before the New Year begins.

     The few mortgage investors still at their desks next Tuesday will get a look at the final estimate of economic growth for the third-quarter.  The majority of economists expect Q3 Gross Domestic Product will register a reading of 2.8% -- exactly matching the previous guesstimate.  Tuesday also brings expectations for an improved pace of November existing home sales.   The day starts off on Wednesday with the November Personal Income and Spending report.  Contained within this data series is the Personal Consumption Expenditure Index, one of the Fed’s favorite measure of inflation pressure at the consumer level.  While both income and spending are expected to have edged a bit higher last month -- the pace of consumer inflation is expected to have posted a very modest, and mortgage market neutral gain of 0.1%.  Wednesday’s 10:00 a.m. release of the November New Home Sales and Thursday’s initial weekly jobless claims and November durable goods orders numbers will likely draw as much investor attention/interest as a single snowflake in a blizzard.  The mortgage market will close early at 2:00 p.m. ET on Thursday and will remain closed on Friday for the celebration of Christmas.
 
 
Following a stronger-than-expected weekly jobless claims number - mortgage investors were quick to push mortgage interest rates fractionally higher in the day's early going. 

According to the Labor Department, new applications for jobless benefits unexpectedly fell by 5,000 last week to the lowest level in more than 14 months.  While this jobless claims report falls outside of the survey period for tomorrow's 8:30 a.m. ET release of the far more important November nonfarm payroll figures -- some investors wasted no time placing their "bets" for a surprisingly mortgage market unfriendly employment story. 

I personally think these mortgage investors may have jumped the gun a bit.  Even though the first-time claims number was better than the majority of economist had anticipated - the number of people continuing to collect benefits after the initial week rose by 28,000.   Going one step further, with hiring so slow, the unemployed are exhausting their regular benefits (26 weeks in most states) and instead are claiming extended benefits or Emergency Unemployment Compensation.  Growing totals for these programs have more than offset the decline in the regular weekly jobless claims number.  For the week ending November 14th, the enrollment in the extended benefits programs offered by the government grew by 323,000.   From this perspective, the weekly jobless claims numbers are almost certainly glossing over the underlying anemic conditions in the labor market.

     The probabilities remain high that Friday's November nonfarm payroll will fall within shouting distance of the consensus estimate for a national job loss number of 130,000.  If so, the Labor Department's data will likely exert little, if any influence on the mortgage market.   On the other hand, if the headline number shows the economy lost 150,000 jobs or more and/or the national jobless rate exceeds 10.3% -- the odds are high that a large number of investors will be caught leaning the wrong way - resulting in higher prices and lower mortgage interest rates before the day is over.

 
 
Earlier this morning the government reported the pace of October Retail Sales rose a brisk 1.4% -- but were much less impressive once auto sales were stripped out.  The "ex. auto" component of this report posted a lower than expected gain of 0.2%.  Even so, given the backdrop of a very anemic labor market, the October retail sales numbers were about as good as could be hoped.  Consumers remain financially constrained with wage income running 5.0% below its year-ago mark - a condition strongly suggesting recovery at the retail level will continue to be lethargic for many months to come.  In the convoluted world of mortgage interest rates investors see slow retail sales activity as a indication that demand for capital will remain low - a scenario that tends to support steady to perhaps fractionally lower mortgage interest rates.   

Definitely worth mentioning again - the Federal Reserve reached a milestone with its direct mortgage-backed purchase program last week, topping the $1 trillion mark.  The Fed's purchases of agency mortgage-backed securities totals roughly $1.007 trillion so far in 2009.  The central bank has started to slow the pace of its purchases, with buying decreasing from about $25 billion per week in mid-September to only $13.5 billion for the most current week ending Wednesday, November 11th.  The Fed is committed to buying the entire $1.25 trillion allotted for its direct mortgage-backed security program by the end of March 2010. 

These security purchases by the Fed have been hugely supportive of lower mortgage interest rates.  (The following maybe a bit technical for some - but bear with me - and please don't stop reading.)  The yield premium on Fannie Mae mortgage-backed securities paying 4.5% compared with the 10-year Treasury note (the assumed "riskless" rate of return) tightened to 0.668 percentage points last Thursday from 0.720 percentage points last Tuesday, according to Reuter's data.  When yield premiums tighten - mortgage rates move lower.  For comparison, the yield premium was around 1.863 percentage points last year prior to the initiation of the Fed's direct mortgage-backed security purchase program. 

The "so what" factor here is probably obvious to most - mortgage interest rates are almost certain to begin a move to higher levels as the Fed's direct purchase program draws to close.  Look for the pace of the upward move to be in direct, but opposite correlation to the number of dollars remaining in the central banks checkbook.  The fewer dollars rolling around in the bottom of the Fed's bucket - the more intense the upward pressure on mortgage interest rates will become.  Ultimately mortgage interest rates will once again reach their natural equilibrium point -- but until then -- the process of transition may be uncomfortable for those insistent upon trying to hope and wish rates to dramatically lower levels.   I'll keep you posted on the Fed's "burn rate" as this mortgage market friendly program fades into history.       

 
 
Trading activity is thin this morning as investors await the results of this afternoon’s $16 billion sale of 30-year bonds by the Treasury Department.  This auction represents the last leg of a record-sized $81 billion three-part borrowing spree by Uncle Sam.  The Treasury sold $40 billion of 3-year notes on Monday and $25 billion of 10-year notes on Tuesday.  The 10-year sale drew decent demand while the 3-year note auction generated the strongest buyer appetite in more than 20 years.  One group of analysts is arguing the falling dollar will lure bargain shopping foreign investors in droves to today’s 30-year bond sale. The opposing camp is equally convinced that now that the Fed is no longer actively adding to their fixed-income portfolio, these longer-dated securities will likely require higher yields to attract the necessary capital. 

Everybody will be watching intently to see if demand steps up on its own.  If so, interest rates in general -- and mortgage interest rates in particular --will likely remain little changed.  On the other hand, if private demand is weak -- mortgage investors will almost certainly register their displeasure by pushing mortgage interest rates noticeably higher. 

  In other news of the day – the government reported the number of workers filing new claims for jobless benefits dropped by 12,000 last week.  The four-week moving average of new claims, considered a better gauge of underlying trends, fell by 4,500 for the period.  During the latest week for which data is available (week ended October 24th) enrollment in extended benefits programs decreased by 28,240 while the Emergency Unemployment Compensation program enrollment rose by 22,400.  

Behind all this statistical mumbo-jumbo a story of very gradual improvement in the labor sector is beginning to emerge. Even so, it will likely be an extended period of time before the worst collapse in the labor sector since the Great Depression is declared officially over.  Recent economic improvement has to be sustained for many months for hiring to resume, as businesses first increase existing worker hours and bring on temporary workers before increasing payroll head count.  The majority of analysts firmly believe it will be well into the second-half of 2010 before the Labor Department’s headline nonfarm payroll report shows any meaningful gains.  Over the same time frame labor market data will tend to mute the development of upward pressure on mortgage interest rates emanating from other influences.
 
 
Equities are looking to extend yesterday’s losses in this morning’s pre-trading session. The data schedule is light today with no major releases scheduled to hit markets in the morning, although in the afternoon investors will eye the Fed’s Beige Book, a comprehensive, anecdotal report on economic conditions across all 12 Federal Reserve Districts.

Just before 7:00, the Dow is trading 47 points lower after shedding 5o points yesterday, putting the industrial led index just below the 10,000 threshold. S&P 500 futures are trading 5.7 points lower at 1,083.70.

As the dollar continues to rebound from 14-month lows, spot gold has fallen to $1,058.50 per troy ounce. The euro has once again failed to break past the key $1.50 level. 

In earnings, investors will be focusing on Q3 reports from Wells Fargo and Morgan Stanley, among others.

Key Events Today:

2:00 ― The Fed’s anecdotal summary of economic conditions, the Beige Book, should confirm broad improvement in the economy across most Federal Reserve districts. Growth is uneven between districts, however, and commercial real estate activity is suffering across the nation.

“The report is likely to emphasize that government aid has underpinned the recovery and that the prospect for strong growth once support is withdrawn remains uncertain,” said analysts from Nomura. 

The Beige Book from September 9 said the economy “continued to stabilize in July and August,” but officials noted that “labor market conditions remained weak across all Districts.”

4:30 ― Eric Rosengren, President of the Boston Fed, speaks on regulatory and monetary policy as he opens the bank’s annual Cape Cod economic conference in Chatham, Massachusetts. 

 
 
 
Retail sales were better than anticipated in September as broad based gains helped offset a 10.4 percent decline in motor vehicle sales.

Total retail sales declined by 1.5 percent in September, less than the 2.1 percent drop economists had forecast. Excluding auto sales, which experienced their largest monthly fall since August 2005, retail sales were 0.5 percent higher in September, better than forecasts for a 0.2 percent increase.

Economists expected the expiration of the government's Currency for Clunkers rebate program to drag down the monthly change in total retail sales, however a 1.4 percent gain in home furnishing sales, a 1.1 percent increase in gasoline sales, a 0.9 percent boost in grocery sales, as well as a 0.9 percent improvement in general merchandise purchases helped offset the anticipated decline in auto sales.

There is a lot of optimism in the economic forecast released by the Mortgage Bankers Association (MBA) on Monday, but a lot of realism .

The association expects economic growth to continue for the rest of this year but to slow down again during the first half of the next. The MBA says real GDP which will be a negative 0.5 percent in 2009 despite gains in the second half of the year will rise to about 3 percent in 2010

Jay Brinkmann, MBA's chief economist and senior vice president for research and economics said, "The recession is behind us but the effects of the recession will linger for some time in the form of higher unemployment, and lower levels of business investment and home construction. Six of the gigantic questions regarding growth will be the behavior of consumers. The large losses of consumer wealth in the form of reduced home values and stock market losses, as well as the absolute losses of income resulting from unemployment, reduced employment and the fear of unemployment have constrained consumer spending."

While lots of forecasters are saying that employment is improving, MBA sees unemployment continuing to climb, reaching 10 percent from the current 9.8 percent by the finish of the year and peaking at 10.2 percent before it begins to decline at the midpoint of 2010.

The rate of existing home sales this year is expected to be 2 percent higher than in 2008 and will increase another 11.2 percent during 2010. However, new home sales for 2009 will be down by about 18 percent relative to 2008. Sales seemed to have bottomed in the first quarter of 2009 and have been rebounding modestly since. This should improve next year; new home sales should post an increase of around 21 percent from 2009's low levels.

The forecast projects that mortgage rates will remain stable at around 5 percent through the finish of the year but will rise to around 5.6 percent by the finish of 2010. The low rates will spur refinancing which are expected to hit $1.25 trillion by the finish of 2009 from $777 billion in 2008. As rates rise, however, the refinancing boom will slow to around $745 billion next year. All originations, however, are expected to reach $1.5 trillion as modest increases in home sales compensate for the decline in refinancing. Purchase originations this year are about 2 percent below the level of 2008 but should rise next year by about 12 percent from the total the 2009 figure of $718 billion.

Brinkmann stated, "Timing of the economic recovery is much tied to the growth in consumer spending. In addition, the effect of the bulk of the federal stimulus package, the construction components, is not expected to be felt until 2010.

The drop in home prices nationally may finally reach an finish by early next year but that will vary by locality and home value with demand expected to be highest for entry level homes.

"Perhaps the biggest unknown is the level and volatility of interest rates. While the lack of inflation, high unemployment and excess capacity in the economy should hold interest rates down, there is a lot of uncertainty regarding rates immediately following the termination of the Federal Reserve's purchase of mortgage-backed securities. No doubt the Fed will do its best to minimize adverse effects, but the elimination of these purchases will put upward pressure on all long-term rates as well as the spread between mortgage rates and Treasuries. The size of any resulting rate move will largely choose the size of the refinance mark
 
 
Equity markets look poised to extend the two-day rally this morning. The day ahead is light on data, with only the consumer credit report at 3pm, but Q3 earnings reports also kick off after the bell beginning with Alcoa. 

Broad gains in the Asian session ― +1.11% in the Nikkei and +2.07% in the Hang Seng ― are increasing sentiment that a global recovery is underway. Even as equities rally, the dollar remains weak, helping gold prices reach fresh record highs.

“Gold prices are now front and centre, drifting further into record territory at US$1,047/oz this morning alongside a still-weakening U.S. dollar,” said analysts at BMO Capital Markets. They added that commodity currencies, such as the Canadian dollar, are “particularly strong.” 

Also, at 7am markets learned that that average rates for a 30-year mortgage remained below 5% for the third consecutive week. That helped the MBA’s Market Composite Index, a measure of mortgage loan application volume, increase 16.4% last week.

“Although there seems to be limited room for further declines in mortgage rates, a last minute rush by first homebuyers who are qualified for the one-time tax credit may boost purchase filings,” said analysts from Nomura.

Key Events Today:

10:00 ― House Financial Services hearing on Derivatives.

2:30 ― Senate Banking Committee hearing on “Securitization of Assets: Problems and Solutions.”

3:00 ― Consumer Credit isn’t often a key report, but banks are holding standards tight and consumers are shifting to savings mode, which gives this monthly report additional emphasis. In July credit outstanding fell by a record $21.6 billion, but though the underlying pace of contraction appears to be accelerating, analysts believe credit should fall by “only” $8.5 billion in August due to the success of the cash-for-clunkers incentive program.

“For the long term, lower US consumer borrowing is clearly a positive and will likely be an important part of rebalancing the global economy,” said analysts from Nomura Global Economics. “For the short-term, however, efforts to reduce debt are a negative for consumer spending, all else equal. If the aggressive pace of debt repayment continues, it may hinder the ability of the economy to emerge from recession.”
  • Treasury Auctions:
  • 1:00 ― 10-Year Notes ($20 billion)
 
 
The economy shed more jobs than Wall Street was expecting in September, sending equity futures south in search of a bottom after three straight days of sell-offs. The monthly employment report said 263,000 jobs were lost in September, almost one-hundred thousand worse than the market forecast.

Job cuts pushed the unemployment rate up one-tenth to a fresh 26-year high at 9.8%. That rate is made worse knowing the average duration of unemployment also sits at a record high of 26.2 weeks. Indeed, more than one-third (35.6%) of the unemployed have been jobless for 27 weeks or more.

Since the recession hit the economy in December 2007, the number of unemployed persons has increased by 7.6 million to 15.1 million, and the unemployment rate has doubled.

“The axe swung hard and it swung wide,” said Jennifer Lee from BMO Capital Markets. “All industries, save information, passed out pink slips during the month.” 

Job losses in September were worse than August’s decline of 201,000, but a wider lens shows that declines have moderated significantly from earlier in the year. Average monthly losses from May to September were 307,000, less than half the average of 645,000 per month from November 2008 to April. 

The report also said average workweek hours was cut back slightly, while earnings only advanced marginally (details below.) 

“The economy went off-roading in September, but will get back on road to recovery,” Lee added.

Losses by Sector:

Construction jobs fell by 64,000 in September, just below the monthly average of 66,000 for the past five months and well below the average of 117,000 per month from November to April. In line with yesterday’s construction spending report, the losses were concentrated in the nonresidential side (-39,000) and heavy construction (-12,000). Since December 2007, employment in construction has fallen by 1.5 million.

Manufacturing employment declined by 51,000, in line with the three-month average of 53,000 per month, and well below the monthly loss of 161,000 from October to June. Employment in manufacturing has contracted by 2.1 million since the onset of the recession.

Jobs in the service sector fell by 39,000, 10k more than the average from April to September. That’s still a moderation from the average monthly loss of 68,000 in the prior 6-month period.

Government employment slashed by 53,000 in the month, with the largest decline occurring in the non-education component of local government

(-24,000).

Health care was the only sector continuing to increase in September. About 19,000 were created in the month, with the largest gain occurring in ambulatory health care services (15,000). Since the start of the recession, the health care sector has added 559,000 jobs to the economy.

Other: Jobs in transportation and warehousing continued to trend down in September; little or no change was seen in the financial sector, professional & business services, leisure & hospitality, and information.

Other Key Details:

The average workweek edged down by 0.1 hour to 33.0 hours. (Both the manufacturing workweek and factory overtime decreased by 0.1 hour, to 39.8 and 2.8 hours, respectively.)

Average hourly earnings edged up by 1 cent, or 0.1%, to $18.67. Over the past 12 months, average hourly earnings have risen by 2.5%, while average weekly earnings have risen by only 0.7% due to declines in the average workweek.

“For the quarter, aggregate hours were down -3.0% at an annualized pace, an improvement versus Q2’s -7.8% annualized decline,” said Joseph LaVorgna, chief US economist at Deutsche Bank.

The number of discouraged workers ― those not currently looking for work because they believe no jobs are available ― rose to 706,000 in September, a rise of 239,000 compared to last year.

The all-in unemployment rate (basic rate + discouraged workers + involuntary part-timers) rose two-tenths to a record 17%.

Also note that annual benchmark revisions indicated that earlier cuts were even deeper than originally reported. The new estimates say 824,000 more jobs were cut than previously thought, which is the largest downward revision since records began 25 years ago.

Market Reaction: 

Markets saw a huge sell-off yesterday and that was only on mixed news. Today’s report is genuinely bad so another sharp decline should be expected. Equity futures were already trading lower prior to the release. The worse-than-expected figures caused the decline to deepen.

“The trajectory for jobs looks weak heading into 2010, and we continue to recommend taking profits in long positions in stocks,” said analyst John Herrmann after the report. “Stocks may have hit their highs for the year in September 2009.”