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Tuesday 8/19 ... Mortgages Staying Strong

Posted: 8/19/2008 12:57:00 PM

Ever since we received the "good news," which was not really news at all, but rather the markets' reacting less violently to the CPI report than expected, we have not lost much ground despite varying degrees of "friendliness" coming across in the data.

The item of note came this morning in the form of the PPI or Producer Price Index.  This report, too, came in with worse than expected inflation--much worse actually, but the markets batted nary an eyelash.  To reiterate the previous post, it seems that all have decided inflation is in desuetude owing to falling commodity prices.  So the CPI and PPI reports, engendered as they are from the epoch of runaway commodity prices "long since" deposed, is seen as a lagging indicator.  

Traders now "look to the future," taking note that commodities have fallen faster than almost any other time in history, and assuming this will therefore mitigate inflation.  Hopefully they're right.  Whatever the case, they sure are trading like it as fixed income has fared defiantly well in the face of inflation data and several other reports that were stronger than expected.

The net effect is that rates have held steady for a three day period where they otherwise 'shouldn't.'  What I mean is that on average, in the past when the markets have been presented with similar data, it has generally led to a worsening in mortgage rates.  There are two ways to interpret this phenomenon and indeed even mega-firms like Deutsche Bank and Chase interpret them in different ways.  Either the mortgage market is poised to go on a tear (lower rates) or it is clinging to the last edge of hope before rates move even higher.

So plan for risk accordingly.  We've been maintaining for a while that if rates could hold above the 99-18 level that more strength SHOULD follow.  And it will follow as long as a couple very real threats do not materialize.  Threat 1 is that the markets are making the wrong bet on inflation.  not likely but possible.  Threat 2 is that there continues to be worse than expected write-downs, shake-ups, analyses, etc... regarding firms that are MBS-heavy (that is to say, the largest of the world's capital market players who actively trade and hold Mortgage backed securities).  This latter is much more of a threat.  There is uncertainty as to what extent the risk of that threat has already been "priced in" to the markets.  Chase thinks it's already been priced in enough, Deutsche Bank, not quite enough but almost.  

Whatever the case, if you have a short term closing, or are otherwise sensitive to price changes for the worse, locking now is not a reprimandable choice as we are at week to week highs right now.  However, given a few days to a few weeks of float time, and assuming a relative 'status quo' of the data stream, it's hard to see how floating would not land you in, if not equal, slightly better position.

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