We are starting of the week on a positive note for mortgages but it had been a rough few days that started mid-last week. Now it is extremely hard to be too upset if mortgages get beat up a little bit because of how far we have come but it was obvious that by mid-week investors had seen enough. It is sort of like eating White Castle hamburgers. It seems like a good idea at the time but then it takes a quick turn for the worse. So in mortgage land once originations picked up and at least matched the Fed demand, investors got very nauseous with the fact that they were long mortgages at extremely inflated prices.
Owning an asset that has a 107 dollar prices that is very vulnerable to be refinanced is not something that â€œtrueâ€ investors are comfortable with. So they sold and put a lot of pressure on mortgages. But this is a battle that will go back and forth as it appears the Fed came into the mortgage market early today and have push mortgage prices back to levels that have resulted in them out performing the Tsy markets. This will be the case until the Fed exits which will not happen until the beginning of 2013 at the earliest.
We do have a busy economic calendar this week with the ADP report on Wednesday (8:15) followed by another big NFP report on Friday (8:30). The stakes are getting very high regarding the results of these reports for 2 reasons. First is politically. There are only 2 more NFP reports left before we elect a new president and unless you share a rock with Patrick Starr you know that this election has become all about jobs and the economy.
It does appear that Obama is in the driverâ€™s seat but if the final 2 reports are disastrous and if Romney performs well on these upcoming debates then it could (or should) make Obama a 1 term president. And we all know that the 2 candidates have vastly different views on economic policy. So a lot is riding on these 2 reports not just for the candidates but for the future of our country. Second is the impact that the NFP report has on future Fed policy. The Fed made it very clear that job growth and creation was the driving force behind QE3.
So what that means is that future Fed policy will be dictated by these NFP reports. What it also means is that the markets will react even more aggressively to these reports as they try and anticipate the Fedâ€™s next move. Now the Fed made it clear that they are into QE3 beyond the obvious exit point. They clearly stated that a few strong indications of economic/job growth will not result in any policy change. So to use a sports analogy they will make the trade 1 year too late as opposed to 1 year too early. Therefore I would expect the markets to take this in consideration but that does not mean they will not react with aggression by selling US treasuries if job growth takes off. Based on what we have seen recently that is not expected but the unexpected is what drives the markets to new levels.