Mortgage Rates Increase Following Central Bank Meetings

Over the past week, two key central bank meetings were the primary focus for investors. The outcomes of both the European Central Bank (ECB) and the U.S. Fed meetings were viewed as unfavorable for bonds. As a result, mortgage rates ended the week higher. 

As it had telegraphed to investors for a long time, the Fed raised the federal funds rate by 25 basis points on Wednesday. Less widely anticipated, Fed officials also raised their projections for the pace of rate hikes in 2017 due to quicker expected progress in achieving the Fed's goals for the labor market and inflation. In addition to raising rates, the Fed has stated that it expects to eventually tighten monetary policy by shrinking its investments in Treasuries and mortgage-backed securities (MBS). The faster the Fed raises rates, the sooner it is expected that the Fed will reduce its holdings of MBS, which is negative for mortgage rates.

Ahead of the meeting on December 8, investors generally expected that the ECB would extend its bond purchase program for another six months at its current pace. The ECB exceeded this in one way by extending the program by nine months, meaning that it will now end in December 2017. In a more important area, however, the ECB disappointed investors. The ECB announced that the monthly purchases will decrease from 80 billion euros to 60 billion euros beginning in April. The reduction in the level of stimulus removed some expected future demand for bonds, causing mortgage rates to rise.

Wednesday's data on retail sales was one of the few recent reports on economic activity, which fell short of expectations. Excluding the volatile auto component, retail sales in November rose just 0.2% from October, well below the consensus for an increase of 0.4%, and the results for October were revised lower as well.

Looking ahead, The Consumer Price Index (CPI), a widely followed monthly inflation report, will come out on Thursday. CPI looks at the price change for goods and services that are sold to consumers. The Housing Starts report will be released on Friday, and Existing Home Sales will come out on December 21. In addition, a meeting of the Bank of Japan on December 20 could influence U.S. mortgage rates.

Information originally provided by:
HomeStreet Bank
The Sanders Young Team
NMLS ID #487525 and #438324
HomeStreet Bank
720 Lilly Road SE
Olympia, WA 98501
360-259-2266 Teri/360-250-3799 

No Change From Fed

Over the past week, shifting expectations for foreign central banks and headlines about the U.S. election were the main influence on mortgage rates. The U.S. economic data had little impact. Mortgage rates ended the week a little higher. 

As widely expected, the U.S. Fed made no policy changes on Wednesday, and its statement was very similar to the prior one. Investors still think there is roughly a 75% chance for a federal funds rate hike at the next meeting on December 14, nearly unchanged from before the release of the Fed statement. There was little market reaction to the Fed meeting. 

By contrast, recent news from Europe and Japan was negative for global bonds. Due to better than expected European economic data, concerns grew that the European Central Bank (ECB) may see less need to increase its monetary stimulus, particularly its bond purchases. In addition, an official of the Bank of Japan (BOJ) said that the BOJ may not increase its bond purchase program, disappointing some investors. Bond purchases from central banks around the world have helped push global bond yields lower in recent years, so indications that there may be less stimulus in the future caused yields to rise, including U.S. mortgage rates. 

One reason that the U.S. Fed is able to wait longer to tighten monetary policy is that inflation has risen very slowly so far this year and remains below the Fed's target. The recently released core Personal Consumption Expenditures (PCE) price index, the inflation indicator favored by the Fed, was 1.7% higher than a year ago, matching expectations. Core PCE has remained close to current levels all year. According to the Fed statement, Fed officials expect that inflation will rise to their target of 2.0% "over the medium term." 

The U.S. election also has influenced mortgage rates. Generally, news that favors Trump has been positive for bonds and negative for stocks. News that favors Clinton has caused the opposite reaction. 

Looking ahead, the Institute of Supply Management (ISM) Services index will be released on Thursday. 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. The Job Openings and Labor Turnover Survey, or JOLTS, which measures job openings and labor turnover rates, will come out on November 8. The election also may continue to influence mortgage rates. 

This information provided by: The Sanders Young Team, NMLS ID #487525 and #438324
HomeStreet Bank
720 Lilly Road SE Olympia, WA 98501

Shutdown Continues

The past week can be characterized by its lack of significant economic news, and there has been no apparent progress in Congress in reaching an agreement on critical fiscal issues. Economic reports normally produced by the government are not being released during the shutdown. Without much new information, mortgage rates ended the week with little change. 

As the government shutdown continues, its impact on the mortgage market grows. It is causing some disruptions in the mortgage origination process, and it is limiting the amount of economic data which is released. The Employment report, the most important economic data of the month, did not come out as scheduled on Friday due to the shutdown. Several other significant reports on inflation and economic growth will be postponed as well. This lack of data makes it difficult for investors to get an accurate reading on the performance of the economy.

It was announced that President Obama will nominate the Fed's current second in command, Janet Yellen, to be the next Fed Chair when Ben Bernanke's term ends in January. Since Lawrence Summers withdrew from consideration, Yellen has been the clear front runner. Her views are similar to Bernanke's, and she is not expected to make any dramatic changes to current monetary policy. Her statements indicate that she favors loose monetary policy to help reduce the level of unemployment. She is a firm supporter of the Fed's bond buying program, which is favorable for mortgage rates.

Mortgage markets are in a holding pattern as investors wait for a compromise of some sort in Congress to fund the government and to raise the debt ceiling. According to the Treasury, the debt ceiling limit will be reached around October 17. After that, the government will be at risk of defaulting on its obligations, which could cause severe disruptions for the economy and financial markets. A significant deal should reduce the level of uncertainty. A deal which simply postpones the decisions for a short period of time would have a more limited impact. 

Information courtesy of Mike A Japhet, NMLS ID# 54723, Originator, Madrona Mortgage, 360-352-0237, mike@madronamortgage.com