Economic Commentary October 2016
ECB Comments Hurt Mortgage Rates
Over the past week, comments from the European Central Bank (ECB) and stronger than expected U.S. economic data were negative for mortgage rates. As a result, mortgage rates ended the week higher.
While the U.S. Fed has already taken its first baby step in tightening monetary policy, many investors still are hoping for additional stimulus from the ECB. On Tuesday, however, the ECB made investors less optimistic that this will happen. An unnamed official at the ECB said that a "consensus" was forming to gradually wind down the ECB's bond buying program. According to the ECB, the start of the winding down or tapering will depend on incoming economic data. The plan sounds very similar to what the U.S. Fed did to end its bond buying program.
The added demand for bonds from central banks around the world has helped push down yields, so these comments caused global bond yields to rise, including U.S. mortgage rates. Of note, the ECB gave just a hint of a plan to taper its bond purchases sometime in the future, and investors reacted negatively. When the ECB actually announces the expected timing of the taper, we will likely see a larger reaction in global markets.
In the U.S., two major recent economic reports added support for the case for tighter monetary policy from the U.S. Fed. After falling to the lowest level since 2010 in August, the ISM national services index jumped in September to the highest level since October 2015, far exceeding the consensus forecast. The ISM national manufacturing index also beat expectations. Both readings came in above 50, which signals an expansion in each sector.
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. The JOLTS Report, which measures job openings and labor turnover rates, will come out on October 12. The retail sales data will be released on October 14. The next ECB meeting will take place on October 20.
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