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Fed Favorable for Mortgages, but Pending Sales Down YoY

Overview: Wednesday’s U.S. Federal Reserve meeting was favorable for mortgage rates. The European Central Bank meeting on January 24 and the latest U.S. economic data had little impact, and mortgage rates ended the week lower.


As anticipated, the Fed made no change to the federal funds rate. However, investors were pleased by the Fed’s unexpectedly dovish tone, signaling a lean toward looser monetary policy. First, the Fed removed the language indicating that “further gradual increases” in the federal funds rate likely would be appropriate and instead adopted a more cautious approach to the need for more rate hikes. In addition, the Fed indicated that it will consider adjusting the size of the reduction in its massive bond portfolio. Looser monetary policy generally is viewed as positive for bonds, and mortgage rates improved following the meeting.

By contrast, the European Central Bank (ECB) meeting produced no surprises. The ECB held its benchmark interest rates steady and said that it will not raise rates, at least through the summer of 2019. According to the ECB, risks to economic growth in the region changed from being evenly balanced to favoring the downside for a number of reasons. These include financial market volatility, geopolitical uncertainties, protectionist trade policies, and "vulnerabilities in emerging markets." The meeting caused little reaction in U.S. markets.

Much like last week’s report on sales of previously owned homes, the data for pending sales of previously owned homes released this week also indicated that housing market activity tapered off near the end of 2018. In December, pending sales unexpectedly declined from November and were 10% lower than a year ago. Pending sales are based on contracts signed rather than closings, so they are viewed as a leading indicator of future home sales activity. This report marked the lowest reading in nearly five years.

Week Ahead

Looking ahead, the important monthly Employment Report will be released on Friday. As usual, these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, the Core Personal Consumption Expenditures (PCE) Price Index, the inflation indicator favored by the Fed, is scheduled to be released on Thursday. The Institute for Supply Management (ISM) Manufacturing Index will come out on Friday, followed by the ISM Services Index on Tuesday. The government shutdown, which began on December 22 and ended on January 25, could affect some of these release dates.

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