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Upside Surprise in GDP

Overview: Stronger than expected economic data was the primary influence on mortgage rates over the past week, and rates ended slightly higher.


On Thursday, the government finally released the crucial report on gross domestic product (GDP), the broadest measure of economic growth, which had been delayed for many weeks by the government shutdown. GDP increased 2.6% during the fourth quarter of 2018, down from 3.4% in the third quarter, but substantially above the consensus forecast for a reading around 2.0%. Key areas including business investment and exports showed unexpected strength. For the entire year, GDP rose a healthy 2.9%, which was the highest level since 2015. Since faster economic growth raises the outlook for future inflation, this report was unfavorable for mortgage rates.

While the GDP data was a couple of months old at this point, another important report also posted a major upturn this week, and it is one of the most current major indicators of economic activity. On Tuesday, the Institute for Supply Management (ISM) Services Index for February jumped to 59.7, which was far above the expected levels. For perspective, readings above 50.0 indicate an expansion in the sector, and there have been only a handful of readings above 60.0 since recording of the index began in 2008.

In other current news, as expected, President Trump did not impose the increase in U.S. tariffs on Chinese goods, which had been scheduled to take place on March 1. According to trade officials, the U.S. will postpone tariff increases “until further notice” to give the two sides additional time to negotiate an agreement. A trade deal likely would lead to faster global economic growth, so signs of progress generally have been negative for mortgage rates. Since this announcement had been widely anticipated in advance, however, its impact was minor.

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. The Retail Sales report will be released on March 11. Since consumer spending accounts for about 70% of all economic activity in the U.S., the retail sales data is a key indicator of growth. The Consumer Price Index (CPI) will come out on March 12. CPI is a widely followed monthly inflation report that looks at the price change for goods and services. In addition, the next European Central Bank (ECB) meeting will take place on Thursday and could influence U.S. mortgage rates. Investors will also be watching for signs of progress in the trade talks between the U.S. and China.

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