Another Missile Test
Overview: Over the past week, yet another increase in tensions with North Korea was positive for mortgage rates. Recent economic data had little impact. As a result, mortgage rates ended at the best levels since before the November elections.
North Korea conducted another missile test on Sunday. This was the most powerful missile yet. The reaction by investors to the uncertainty about where this could lead was a "flight to safety." This means that they shifted from riskier assets, such as stocks, to relatively safer assets, including U.S. mortgage-backed securities (MBS). The added demand for MBS caused mortgage rates to decline.
The earnings component of the key Employment Report from the Bureau of Labor Statistics released on Friday showed that the annual rate of wage growth in August held steady from July at 2.5%, which was lower than expected. When the labor market tightens and the unemployment rate drops, companies usually are forced to compete for workers by raising wages. Early in the year, this appeared to be happening, as annual wage growth looked to be rising toward 3.0% or higher. For the last six months, however, the annual rate has been holding steady around 2.5%. Possible reasons include demographic changes and a shifting mix of higher paying versus lower paying jobs. In any case, a lower level of wage growth reduces future inflationary pressures, which is good for mortgage rates.
Looking ahead, there will be a European Central Bank (ECB) meeting on Thursday, which could affect U.S. mortgage rates. Investors will be looking for information from the ECB about future plans for tapering its bond purchase program. In the U.S., the Consumer Price Index (CPI) will come out on September 14. CPI is a widely followed monthly inflation report. The Retail Sales report will be released on September 15. Consumer spending accounts for about 70% of economic activity in the U.S., and the retail sales data is a key indicator.