More jobs lost

Thursday, November 20, 2008

The number of workers filing for first-time jobless benefits surged by 27,000 last week - to its highest level in 16 years. The report reinforces mortgage investors' expectations for another big 200,000+ drop in the headline November nonfarm payroll report scheduled for release at 8:30 a.m. ET, Friday, December 5^th.

The benign inflation picture painted by this week's producer and consumer price indexes together with lousy news from the labor sector virtually guarantee the Fed will slash their benchmark fed fund rate by 50 basis-points when central bankers huddle for a one-day meeting on December 16^th. The impact all this mumbo-jumbo will exert on the current level of mortgage interest is very limited - since expectations for massive amounts of gloomy economic news and a Fed rate cut has been priced into the mortgage market for more than a week.

As I mentioned yesterday -- 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.

It is definitely worth noting that the yield on the 30-year bond fell to lows last seen in the 1960's this morning following news of the large surge in the latest jobless claims numbers. The big "so what" factor attached to this bit of news is that the dividend yield for the stock markets has now moved above the yield on the 10- and 30-year bond for the first time since 1958. On a risk-adjusted basis the "best-bang-for-the-buck" equation is swinging in favor of stocks - an event that is likely to threaten the prospects for notably lower mortgage interest rates ahead.

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