Normally, news that the manufacturing sector contracted at a pace faster than expected would tend to be supportive of steady to fractionally lower mortgage interest rates.  This time around mortgage investors did nothing more than yawn when the Institute of Supply Management reported this morning manufacturing activity in December fell to a reading of 32.4, its lowest level since 1980.   The group's gauge, which covers about 12% of the economy, was expected to drop to a reading of 35.4% by most analysts.  Today's muted market reaction to a surprisingly weak December ISM report is a solid indication of just how much "bad" economic news has already been priced into the market. 

As you probably already know, the Federal Reserve reminded market participants on Tuesday that they will begin to "make good" on their November 25, 2008 announcement regarding the direct-purchase of $500 billion worth of agency eligible mortgage-backed securities. A Federal Reserve spokesman said the central bank intends to spend all of the allotted funds by the end of the first-half of 2009. 

Data released late on Wednesday afternoon suggests the Fed's funding capability may extend a bit longer than mid-year.  According to Thompson Reuters, our industry produced a total of $187.4 billion of agency eligible mortgage-backed securities in 2008, down roughly 80% from the 2007 mark of $941.1 billion.  If we were to assume (always a dangerous proposition) that 2009 production will fall somewhere in between these two annual extremes, total agency eligible mortgage-backed issuance for 2009 will amount to slightly more than $500 billion - a number that puts the Fed in position to purchase essentially every agency eligible mortgage-backed security that hits the market in 2009.   I'm hesitant to jump to the conclusion that interest rates on agency eligible mortgages are headed for dramatically lower levels - but I think there is ample reasons to believe skyrocketing mortgage interest rates will not be a predominate feature of the mortgage market for most, if not all of '09.

Looking ahead to next week, the central feature on the economic calendar will be Friday's December nonfarm payroll report.  The market has already priced an expected national jobless loss of 485,000 and a jobless rate of 6.9%.  Chances are the actual numbers will match or fall within shouting distance of the consensus estimate values.  If so, the report's impact on the trend trajectory of mortgage interest rates will not be large, if it registers at all.  In the off-chance the headline December payroll shows a job loss of 300,000 or less and/or the national jobless rates posts a reading of 6.7% or less look for mortgage interest rates to edge fractionally higher.        

 

Today's conforming 30 year fixed rate is at 5.25%.