Thanks for visiting The Mortgage Reports. To stay absolutely current on mortgage markets and important guideline changes, be sure to take my free daily email alerts.

Last week's terrorist attacks in England barely moved markets in a surprising change from past attacks worldwide.

Even as the country remains in "Criticial Alert" status, money is flowing to the U.K. on remarks from the Bank of England, and a foreshadowed interest rate increase.

In the past, terrorism was considered a threat to financial markets and one that created Safe Haven Buying.  Right now, not so much.  So, one of two things is happening:

1. Markets have already priced in the threat of terrorist attacks on the nation
2. Markets are unconcerned with threats and only concerned with real action and damage

Either way, the global non-reaction should change our perspective of how mortgage rates will respond if the United States faces a similar threat in the future.

Source
Country on highest alert after carnage averted
The Sydney Morning Herald
James Button
July 2, 2007, 6:29 A.M.

http://www.smh.com.au/news/world/britain-in-grip-of-terror/2007/07/02/1183228964665.html

In months past, terrorist threats and activity pushed mortgage rates lower as traders positioned for international instability. 

Today, that trend appears to be breaking.  Mortgage rates are flat even as U.K.-U.S. flights are upgraded to "Red Alert" and U.S. domestic flights are upgraded to "Orange Alert". 

In what many analysts are describing as "suggestive of an al-Qaida plot", authorities broke up the plan believed to have included at least 50 people, according to MSNBC.

If mortgage rates aren't moving today, it's because traders have already priced in the threat of terror to securities, or they no longer respond to threats -- just execution. 

Even as the typical "safe-haven" play is not in effect, we may see reasons for rates to drop anyway. 

As security levels step up at airports -- one friend told me that O'Hare security checkpoints are clocking four-hour wait times -- we can expect to hear stories on the news about the hoards of unhappy travelers.

Shame on me for not sourcing this next statement, but I remember reading that there are finally more airline passengers than prior to September 11, 2001.  Today's discovery may reverse that course and prove to be a huge setback for United, American, and Continental.  All three stocks are down so far today, in case you care.

If the number of passengers are down, that means that the airlines will be employing fewer people.  It also follows that U.S. citizens will not be flying to vacation spots so readily.  That directly impacts regional employment and economic growth in seasonal vacation spots including Florida, Arizona, California and Hawaii.  It also harms destination vacation locations all over the country.

Between the airlines, hotels and restaurants, our nation employs a lot of people and as employment goes, so goes our economy.  Unwieldy airport security may cause people to just stay at home.  You can't drive, after all -- gas costs $3.50 per gallon and that's more expensive than the plane ride.  It's a tough choice for a lot of Americans, right.

If the threat of terror keeps people from traveling, it will further slow our economy and give the Fed more reasons to ease off the brakes some in September. 

Safe-haven or not, today's busted plot may cause mortgage rates to fall over the long-term.

The airlines will have to attack passengers' fear head-on to maintain their confidence in the industry, but right now, all that people are seeing are the news headlines and the television broadcasters talking about what "could have gone wrong". 

That's a tough battle to fight for the airlines.

So, for now, security provisions are banning all liquids and gels from flights.  That means that airplane staples such as eye drops and water are disallowed.  If the common American decides that traveling by plane is not worth the risk (or the trouble), it may just crumble several industries at once, and may just force the economy into a terror-caused slowdown.

Source
Homeland Security Advisory System
Department of Homeland Security

http://www.dhs.gov/dhspublic/display?theme=29

Chertoff: U.K. Plot May Be al-Qaida's
Associated Press
August 10, 2006, 11:10 A.M.

http://msnbc.msn.com/id/14280416/

The bond market opened flatter today, and that is interesting in the context of the weekend's news.

It used to be that the threat of jihad tanked the U.S. equities markets, driving a Flight to Quality and lowering mortgage interest rates. 

Today, though, traders are shrugging off Osama bin Laden's latest call for jihad.

It used to be the Iran bragging about its nuclear program caused the Department of Homeland Security to raise the Terror Alert level, creating a Flight to Quality, and lowering mortgage interest rates. 

Today, though, Homeland Security remains at Elevated level -- the same level its been at since it was lowered March 21, 2006.

It used to be that rising oil prices created fear of a U.S. economic slowdown, driving a Flight to Quality and lowering mortgage interest rates. 

Today, though, oil and gasoline costs are skyrocketing and market players are shrugging it off.

Rather than watching oil-related events (as we've come to expect), all eyes are on Friday's Employment Cost Index and the Advance GDP instead.  The former tells us what employees are getting paid; the the latter what goods are costing employees. 

These are wonderful gauges of inflation and that should move markets over the next few days.

At least, that's how it used to be.

Source
Gas Prices Sour at Pump
Stacey Baca
abc7.com, April 24, 2006
http://abclocal.go.com/wls/story?section=local&id=4109897

Iran announced last week that it will restart its nuclear research program after agreeing to freeze all activity as of November 2004.  The freeze had been part of an economic and political incentive program for Iran.

This abridged timeline of the situation is courtesy of Iran Mania:

Aug 26, 2003: UN report reveals Iran has developed two kinds of enriched uranium not needed for peaceful energy production.

Nov 10, 2003: An International Atomic Energy Agency report states: "At the moment, there is no proof that Iran is creating nuclear weapons."

July 31, 2004: Iran admits to having resumed production of parts for centrifuges used for enriching uranium, but insists it has not resumed enrichment.

Nov 14, 2004: Iran accepts complete suspension of uranium enrichment activities, including the precursor process of conversion.

Jan 3, 2006: Iran announces the resumption of nuclear research activities that were suspended for two years.

Jan 10, 2006: Iran removes seals placed by the UN nuclear watchdog on uranium-enrichment related equipment.

The fear about an Iranian nuclear program is that the nation will blackmail, threaten, and/or use brute force on other nations.  Public remarks by Iranian officials have done nothing to quell those fears. 

The thought of nuclear knowledge in Iran is causing jitters in the financial markets and when financial markets get jittery, investors tend to move money from risky investments like stocks and into safer investments, including mortgage bonds. 

More demand for mortgage bonds pushes prices up, and pushes mortgage rates down.

Stories like this one from Iran -- and how it impacts mortgage rates -- should serve as a reminder about the countless influences on mortgage rates.  Just when you think you have the domestic news figured out, something happens internationally that messes up the plan.

(Image courtesy: U.S. Department of State)

We talk a lot about Non-Farm Payrolls data is a fair gauge of economy's direction.  Friday, however, the data got trumped by terror.

Friday morning's Non-Farm Payroll report showed a loss of 35,000 jobs -- much stronger than the consensus estimate of -150,000 jobs created.

In addition, September's originally reported figure of +169,000 was revised higher to +211,000.  Normally, a hot number like this would cause a mortgage bond sell-off. 

At first, it did.  Money moved into the stock market at the expense of mortgage bonds.  Mortgage rates jumped higher at the open. And then came the reversal.

Driven in equal parts by light trading volume against an early market close, the 3-day Columbus Day weekend, and terror fears in Manhattan (which may have kept some traders from reporting to work, too), a flight-to-quality began sometime around mid-morning.

By the end of the day, mortgage rates had taken back the lost ground and then some -- despite really strong jobs data.

So what did we learn today? 

We learned that terrorism (and threats of terrorism) still spooks investors.  The abrupt turnaround in bond markets shows that market players believe that terrorism on American soil can damage the U.S. economy. 

We draw this inference because bonds rallied big today, even as the Non-Farm Payrolls data completely outperformed its expectations.