This morning's September personal income and spending report confirmed what most analysts had been anticipating - spending during the month fell 0.3% -- the biggest month-over-month drop in four years and a capstone to the weakest spending performance by consumers on a quarterly basis in three decades.  Also contained in the report but virtually unnoticed behind the data confirming consumers have "thrown-in-the-towel" on spending was news that personal incomes rose 0.2% after a 0.4% gain last month.  A component of the report that measures price pressure at the consumer level (the personal consumption expenditure index) posted a modest 0.2% gain -- totally dispelling, at least for the time being, investors' fears concerning the inflation outlook. 

This round of data certainly leaves the door wide open for the Fed to cut short-term interest rates further. In today's early going, futures on the Chicago Board of Trade show traders think the chance of a 50 basis-point cut at the conclusion of the Fed's December 16^th meeting is about 75% -- up from odds of 0% just last week.  I think it is worth noting any time the Fed chooses to cut short-term rates - the action is taken with the expressed intention of stimulating economic growth. The "so what" factor here is that investors in the bond and mortgage-backed securities markets are keenly aware of the fact that accelerating economic growth ultimately leads to an increased demand for capital - which in-turn ultimately pushes mortgage interest rates up.  

 As I'm sure you already know, mortgage interest rates have really been struggling to make any notable headway to lower levels of late.  Part of the problem is that investors outside of the United States have pulled back significantly on their normal purchases as they watch the government take step after step and commit billions after billions of dollars to support banks and guarantee a wide range of various debt instruments.  These market participants are astutely aware that the amount of debt the Treasury will need to pay-off within one year has jumped from $1.8 trillion at the end of July to $2.1 trillion at the end of September and is likely to reach almost $2.4 trillion by the end of November.  In total, the government will have to borrow more than $3 trillion in the markets in the next twelve months to replace maturing debt and to fund new programs.  

No matter how you choose to "slice-and-dice-it" the record amount of borrowing to come from Uncle Sam has sent many prospective buyers of mortgage-backed securities - especially 30-year fixed rate mortgages - to the sidelines.  Since early October foreign central banks have allowed investments in agency debt and mortgage-backed securities to drop more $60 billion.  These market participants will likely remain largely on the sidelines until evidence of more aggressive buying by the Treasury, Fannie Mae, Freddie Mac and domestic money-center banks emerges.   Until this gridlock is broken - the prospects for anything more than short-term rallies in the mortgage market remain limited. 

Today's conforming 30 year fixed is at 6.50%.