Offsetting Influences

January 30, 2017

Offsetting Influences

It was a volatile week for mortgage rates. Influences included central bankers, comments from the Trump administration, and economic data. The net effect of these factors was very small, however, and mortgage rates ended the week with little change.

On Tuesday, a top official from the European Central Bank (ECB) signaled that the ECB should soon begin to wind down its monthly bond purchases. Investors viewed these comments as a concerning indication that the ECB is close to reducing the amount of stimulus it provides. Bond purchases from global central banks have helped push yields lower, so the possibility of a reduction in demand from the ECB was negative for mortgage rates.

The first reading for fourth quarter Gross Domestic Product (GDP) showed an increase of 1.9%, a little below the consensus of 2.2%, and down from 3.5% during the third quarter. A much wider trade deficit was the biggest factor in the decline from the third quarter. Strength was seen in consumer spending, home building, and business investment.

For all of 2016, GDP also increased at a pace of 1.9%, which was close to the average level seen since the recession. Mortgage rates moved a little lower following the downside miss on GDP.

In December, new home sales declined 10% from November, which was far below the consensus. Even with the weak December results, new home sales in 2016 were up 12% from 2015. The new homes sales data contrasted with Tuesday’s report on existing home sales which remained near the best levels of the year. One reason for the difference is that the existing home sales data measures closings, while the new home sales data measures contracts signed. This means that the December figures for new homes sales likely were more affected by the higher mortgage rates seen since the election.

The week ahead is full of potentially market moving news. The next Fed meeting will take place on Wednesday. No policy changes are expected. 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. Pending Home Sales and the Core PCE price index, the inflation indicator favored by the Fed, will be released on Monday. The ISM national manufacturing index will come out on Wednesday, and the ISM national services index will come out on Friday.

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