Overview: Once again, the stock market was very volatile over the past week, while it was a much quieter period for mortgage rates. There were no significant surprises from the Federal Reserve or the European Central Bank (ECB), and the major economic data was mostly on target. Mortgage rates ended a little lower.
As widely expected, the Fed raised the federal funds rate by 25 basis points on Wednesday. The big debate among investors concerned the direction of future monetary policy. In this area, the Fed statement was a bit less dovish than many had hoped (dovish means in favor of looser monetary policy). While most of the language in the statement was very similar to that in the prior statement, there was a marked difference in the projections for future policy changes. Fed officials now expect two additional rate hikes in 2019, one less than it had previously forecast in September. Still, many investors had anticipated that the Fed would scale back its projections even more in light of the recent reductions in the outlook for global economic growth and the large declines in major stock markets around the world. Stocks moved lower following the release of the statement, while the net change in mortgage rates was small.
Thursday's ECB meeting had little impact on global bond yields, but it was notable for a couple of reasons. First, the ECB confirmed that it will conclude its bond purchases at the end of 2018, as it had previously announced. However, it will not begin to sell bonds from its extensive portfolio for "an extended period of time." The ECB also lowered its economic growth forecasts for 2018 and 2019.
Consumer spending accounts for about 70% of all U.S. economic activity in the U.S., and investors closely monitor the retail sales data to gain insight into the strength in this area. While below October’s unusually strong pace, sales continued to improve in November. Excluding the volatile auto component, retail sales increased 0.2% from October, and the results for October were revised higher. This is especially good news for the economy as we head into the holiday season.
The most recently released housing data contained mixed news for November. Sales of previously owned homes exceeded the consensus forecast with a modest increase from October, but still were 7% lower than a year ago. Housing starts rose 3% from October, which also was stronger than expected. However, the strength came from the volatile multi-family segment, as single-family starts dropped to the lowest level since August 2017. In addition, the December National Association of Home Builders (NAHB) Housing Market Index showed that home builder confidence unexpectedly declined to the weakest level since May 2015.
Looking ahead, trading volume generally is very light during the holiday period at the end of December. The core Personal Consumption Expenditures (PCE) Price Index, the inflation indicator favored by the Fed, and the Durable Goods report will come out on Friday. The New Home Sales report will be released on December 27, followed by the Pending Home Sales (PHS) Index on December 28. Mortgage markets will close early on December 24 and will be closed on December 25.