Markets very unstable

Wednesday, November 19, 2008

This morning's battery of macro-economic news showed that consumer prices dropped at the fastest rate on record last month while new home construction set a new low as well.

The Labor Department said inflation pressure at the consumer level plummeted 1.0% last month - exceeding the consensus estimate for a drop of 0.7% and marking the single biggest monthly drop in this measure since the department began keeping records in 1947. Much of the plunge in the headline consumer price index was created by a massive 8.6% drop in energy prices during October - a mark that goes into the record books as the largest single monthly decline for this component since the Labor Department began keeping records in 1957. Core prices, which exclude the more volatile food and energy components, edged 0.1% lower - well below analysts' calls for a reading showing a gain 0.1%.

October was a month for the record books. In a separate report the Commerce Department said new-home starts dropped by 4.5% while building permits - a signal of future building intentions -- nose-dived by 12.0%. Both components set new record monthly lows.

Not surprising, the Mortgage Bankers Association of America said the composite index of mortgage application activity fell 6.2% during the week ended November 14^th. The number of loan requests for purchase money mortgages fell 12.6% will refinance application inched 2.6% higher.

Expanding losses in the global stock markets due to roaring recession fears are fueling demand for dollar denominated long-term safe-haven investment vehicles like Treasury obligations and agency-eligible mortgage-backed securities. Investors all around the world are scrambling for low-risk investments that offer returns above inflation. For the time being this "flight-to-quality" buying spree is a godsend for the prospects of steady to perhaps fractionally lower mortgage interest rates. But don't loose sight of the fact that all of the current support for the mortgage market is filtering-in from investors only looking for a safe place to temporarily park their money - rather than from capital market participants making investment decisions for the long-haul. There is a massive difference between these two strategies. The current support for steady to perhaps lower mortgage interest rates can (and probably will) fade as quickly as a whisper in a blizzard. Pay very close attention to price action over the next couple of days.

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