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European Central Banks Turn Hawkish

Overview: Hawkish comments from central bankers in Europe were negative for U.S. mortgage rates this week. A light batch of economic data had little effect. Mortgage rates ended the week a little higher.


Top officials at the European Central Bank (ECB) and the Bank of England (BOE) surprised investors with comments suggesting that they are considering more hawkish (tighter) monetary policy. On Tuesday, ECB President Draghi hinted that the ECB may soon begin to wind down (taper) its bond purchase program as the eurozone economy improves. On Wednesday, BOE Governor Carney said that the BOE will debate raising rates “in coming months.” While tighter monetary policy of any type generally pushes bond yields higher, rate hikes by the BOE would have just an indirect effect on long-term bond yields such as mortgage rates. By contrast, changes in demand from large scale central bank bond purchase programs have a direct effect on global bond yields. As a result, the possibility that the ECB could reduce its demand for bonds was negative for mortgage rates.

The National Association of Realtors (NAR) reported last week that closings on sales of previously owned homes in May were restricted by a low level of homes available for sale. This week, NAR reported that contracts signed in May to sell previously owned homes (pending home sales) were also negatively impacted by the issue. Despite strong demand and low mortgage rates, the NAR Pending Home Sales Index has fallen for each of the last three months. According to NAR Chief Economist, Lawrence Yun, “Buyer interest is solid, but there is just not enough supply to satisfy demand.” Week Ahead

Looking ahead, the Core Personal Consumption Expenditures (PCE) Price Index, the inflation indicator favored by the Fed, will be released on Friday. The Institute for Supply Management (ISM) Manufacturing Index will come out on July 3, followed by the ISM Services Index on July 6. The minutes from the June 14 Fed meeting will come out on July 5. These detailed minutes provide additional insight into the debate between Fed officials and have the potential to significantly move markets. The next Employment Report will be released on July 7.

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