Europe Influences U.S. Markets

Apr 28 2017

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Over the past week, mortgage rates were influenced mainly by events in Europe. The outcome of Sunday's French election was bad for mortgage rates, while Thursday's European Central Bank meeting was mildly positive. The U.S. economic data had little impact. Mortgage rates ended the week a little higher.

One pro-EU candidate (Macron) and one anti-EU candidate (Le Pen) won the first round of Sunday's French Presidential election and will compete in the second round on May 7. Polls indicate that Macron is heavily favored to win the second round, which reduces some concerns that France will leave the European Union. Investors reacted by reversing the flight to safety trade which took place ahead of the election. This means that they shifted back to riskier assets such as stocks and out of safer assets such as mortgage-backed securities (MBS). The increased supply of MBS caused mortgage rates to rise.

At Thursday's meeting, the European Central Bank (ECB) made no policy changes, as widely expected. The tone of ECB President Draghi was more dovish than anticipated, however. Some investors had worried that ECB officials might hint at a reduction in bond purchases by the ECB. The fact that they did not was good news for mortgage rates. 

MortgageNews_4-28.pngThe first reading for first quarter U.S. gross domestic product (GDP) released on Friday was 0.7%, below the consensus of 1.1%, and down from 2.1% in the fourth quarter of 2016. This was the slowest quarterly growth in three years. Weak consumer spending and a decline in inventories were a couple of the primary factors in the shortfall. 

These components are volatile on a quarterly basis, and many economists believe that the weakness in the first quarter simply pushed some economic activity into later quarters. As a result, the report had little impact on mortgage rates. 

Looking ahead, it will be a packed week. The next Fed meeting will take place on Wednesday. No change in rates is expected, but investors will be eager for guidance on the pace of future tightening. The key monthly Employment report will be released on Friday. Before that, important data on inflation, manufacturing, and services will be released. In addition, news about policies from the Trump administration or about the French election on May 7 could influence mortgage rates.

All material Copyright © Ress No. 1, LTD (DBA MBSQuoteline)

Topics: mortgage news

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Apr 07 2017
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Disappointing Job Gains

Apr 07 2017

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A wide range of news was positive for mortgage rates this week. Hawkish comments from the Fed were the only significant unfavorable influence. As a result, mortgage rates ended the week lower, near the best levels of the year.

MortgageNews_4-7.pngFriday's key Employment report showed that the economy added just 98,000 jobs in March, well below the consensus forecast of 180,000. It appears that the weather had a larger than anticipated effect over the last two months. Incredibly warm weather likely boosted the results in February, while a severe storm seems to have slowed hiring in March.

For example, the construction industry added 59,000 jobs in February but just 6,000 in March. The average job gains over the last three months remained at a strong pace of 178,000. Since slower economic growth reduces the outlook for future inflation, the downside miss in the March data was good for mortgage rates. 

Two other events also were positive for mortgage rates this week. On Wednesday, House Speaker Paul Ryan said that tax reform will take longer to accomplish than reforming health care. Tax reform was expected to be inflationary, so a slower pace for implementation is good for mortgage rates. Thursday night, the U.S. launched a missile strike in Syria. In response, investors shifted to relatively safer assets, including mortgage-backed securities (MBS). Added demand for MBS helped mortgage rates.

The primary negative influence for mortgage rates this week was the hawkish tone of Wednesday's minutes from the March 15 Fed meeting. According to the minutes, if the economy performs as expected, Fed officials expect to begin to reduce the Fed's massive $4.5 trillion holdings of MBS and Treasuries before the end of 2017. This would be earlier than had been expected by investors. Added demand for MBS from the Fed has helped push mortgage rates lower in recent years. As a result, investors pushed mortgage rates higher due to the possibility that Fed demand will begin to drop this year.

Looking ahead, investors will be keeping a close eye on events in Syria. In the U.S., mortgage markets will be closed on Friday in observance of Good Friday, but that will be the big day for economic data with Retail Sales and the Consumer Price Index (CPI). Earlier in the week, the JOLTS report will be released on Tuesday, and the Producer Price Index (PPI) will come out on Thursday. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. 

All material Copyright © Ress No. 1, LTD (DBA MBSQuoteline)

Consumers Remain Highly Confident

Mar 31 2017

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There were two main influences on mortgage rates over the past week. The canceled vote on the health care bill was positive for mortgage rates, while an impressive rise in consumer confidence was negative. The offsetting effects resulted in mortgage rates ending the week a little lower.

Last week, President Trump was unable to gather enough votes to pass the health care bill and the vote was canceled late Friday afternoon. This increased investor concerns about Trump's ability to deliver his business friendly policy changes in other areas. Policies which stimulate growth are good for the economy, but they raise the outlook for future inflation. Investors had pushed mortgage rates higher in anticipation of his policy changes. As a result, reduced expectations were good for mortgage rates. 

MortgageNews_3-31.pngTuesday's report on Consumer Confidence from the Conference Board showed an enormous increase to the highest level in a decade. Solid gains were seen in optimism about both present and future economic conditions. Higher confidence levels generally lead to increased future economic activity, so this data was broadly applauded, but it was not good for mortgage rates.

Encouraging news in the housing sector continued this week. In February, the Pending Home Sales index rose 5.5% from January to the second best level in a decade. There are two reports each month which measure sales of previously owned homes. The report on sales of existing homes measures closings during the month, while pending sales measure contracts signed, making the Pending Home Sales data a leading indicator of future closings.

Looking ahead, the important monthly Employment report will be released on Friday. As usual, this data on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, the ISM national manufacturing index and Construction Spending will be released on Monday. The ADP Employment Change and the ISM national services index will come out on Wednesday. 

Topics: mortgage news

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Mar 29 2017

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Mar 16 2017

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Strong Job Gains

Mar 10 2017

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Stronger than expected U.S. labor market data was negative for mortgage rates over the past week. Increased expectations for tighter monetary policy from the central banks in the U.S. and Europe also were unfavorable. As a result, mortgage rates ended the week higher. 

On Wednesday, ADP, a private payroll firm, estimated that there were an enormous 298,000 private sector jobs added in February, far above the consensus of 190,000. This was great news for the economy. However, faster economic growth raises the outlook for future inflation, making it negative for mortgage rates. Fearing that Friday's more highly regarded Employment report from the Bureau of Labor Statistics (BLS) would exhibit similar strength, mortgage rates moved higher on Wednesday and Thursday.

MortgageNews_3-10.pngThe BLS report revealed that the economy added 235,000 jobs in February, a little above the consensus forecast of 190,000. Although the BLS report was a little stronger than expected overall, it was weaker than some investors had feared, and on Friday mortgage rates recovered a portion of their losses.

With the recent string of strong economic data, investors are now nearly certain that the U.S. Fed will raise the federal funds rate at its meeting on March 15. Investors also have significantly raised their outlook for the pace of rate hikes in 2017. In addition, stronger economic growth in Europe may lead to less accommodative monetary policy from the European Central Bank (ECB). At its meeting on Thursday, the ECB made no policy changes, but the tone of ECB President Mario Draghi's press conference was a little more hawkish. In particular, he said that there is no longer "that sense of urgency" to provide new stimulus measures. 

Wednesday will be the big day next week with reports on Retail Sales and CPI in the morning and the results of the Fed meeting in the afternoon. Consumer spending accounts for about 70% of economic output in the U.S., and the retail sales data is a key indicator. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services which are purchased by consumers. As mentioned, the Fed is widely expected to hike rates, so investors will be focused on hints about the pace of future tightening. After that, Housing Starts will be released on Thursday, and Industrial Production will come out on Friday.

Topics: mortgage news

Rising Rate Hike Expectations

Mar 03 2017

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A shift in expectations toward a faster pace of tightening by the Fed was negative for mortgage rates this week. Stronger than expected economic data also was unfavorable. As a result, mortgage rates ended the week higher.

This week, speeches by several Fed officials were more hawkish than expected. This caused investors to expect a faster pace of monetary policy tightening. Futures markets now price in about a 75% chance of a federal funds rate hike at the next Fed meeting on March 15, up from just a 25% chance a week ago. While the federal funds rate is more highly correlated with short-term yields than with long-term yields such as mortgage rates, a faster pace of tightening is bad for mortgage rates because it likely means that the Fed will begin to reduce its holdings of mortgage-backed securities (MBS) sooner. Fed purchases of MBS have helped mortgage rates move lower in recent years, so the shortened expected timeline for reduced demand from the Fed caused mortgage rates to rise. 

MortgageNews_3-3.pngOne reason that Fed officials may be inclined to hike rates this month is that recently released economic data has generally continued to surpass expectations. Since the election, both consumers and businesses appear to be more optimistic about the economic outlook. The February measure of Consumer Confidence from the Conference Board rose to the highest level since 2001

The ISM national manufacturing index increased to 57.7, the highest level since August 2014. Readings above 50 indicate an expansion in the sector. As recently as August, the index was below 50. The ISM national services index also rose more than expected to 57.6, the best reading since April 2015. Stronger economic activity raises future inflationary pressure, which is bad for mortgage rates.

Looking ahead, there will be a European Central Bank (ECB) meeting on Thursday. No policy changes are expected, but guidance about the outlook for future policy could influence U.S. markets. In the U.S., the important monthly Employment report will be released on Friday. As usual, this report on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. 

Topics: mortgage news

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Mar 01 2017

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Focus on Europe

Feb 27 2017

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It was another volatile week for mortgage markets. Uncertainty about the outcome of the elections in Europe had a positive influence on U.S. mortgage rates. The Fed minutes and the economic data had little net effect. As a result, mortgage rates ended the week lower.

One source of volatility is uncertainty about the outcome of upcoming elections in several European countries. Investors are most focused on the presidential election in France which will take place on April 23. Polls show a close race between Marine Le Pen and Emmanuel Macron. Le Pen's campaign has been centered on plans for France to leave the EU and to stop using the euro currency, while the centrist Macron has run on a more traditional platform. It is not clear what would happen to the EU if France decided to exit. As a result, investors have reacted by shifting to safer assets after news which favors a Le Pen victory and doing the opposite after positive news for Macron. Since U.S. mortgage-backed securities (MBS) are viewed as relatively safer assets, they have been affected by the shifts in sentiment, causing volatility. The net effect on mortgage rates for the week was positive.

The Fed was another source of volatility this week. On Wednesday, the Fed released the minutes from the February 1 Fed meeting. Concerned that the Fed might talk about a need to reduce its holdings of MBS, investors pushed mortgage rates a little higher ahead of the release of the minutes. When the minutes made little mention of this topic, investors later reversed their positions, resulting in little net change.

MortgageNews_2-24.pngHome sales begin the year on a strong note. In January sales of previously owned homes rose to the highest level since February 2007. Sales might have been even better if inventory levels had been higher. Total inventory of existing homes for sale remained near record low levels with just a 3.6-month supply. 

Looking ahead, Pending Home Sales and Durable Orders will come out on Monday. The Core PCE price index, the inflation indicator favored by the Fed, will be released on Wednesday. The ISM national manufacturing index also will come out on Wednesday, and the ISM national services index will be released on Friday. Fed Chair Yellen is scheduled to speak on Friday as well. The next Employment report will come out on March 10 (due to February being a shorter month).

Topics: mortgage news

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