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French Election Looms

April 19, 2017

 

Geopolitical events continued to concern investors over the past week. In particular, they are focused on elections in Europe and tensions in the Middle East and North Korea. Recent U.S. economic data also has been weaker than expected. As a result, mortgage rates improved yet again, reaching the best levels since mid-November. 

Investors are worried about the outcome of the French election. The first round of voting will take place on Sunday April 23, and the latest polls show that four candidates
are extremely close. Two of the four favor an exit from the European Union (EU). The two candidates who get the most votes on Sunday will compete in the second round of voting on May 7. If one or both of the anti-EU candidates proceed to the second round, the uncertainty about whether France will exit the EU will increase. Investors have reacted to this uncertainty by shifting to safer assets, including U.S. mortgage-backed securities (MBS). The added demand for MBS has been good for mortgage rates. 

The report on retail sales released on Friday was disappointing. Not only did the March data fall short of expectations, but the February results were also revised lower. Following an enormous monthly increase of 1.2% in January, retail sales, excluding the volatile auto component, were nearly flat over the last two months. Given January’s strength, the average monthly gains during the first quarter still were solid, but they fell short of investor expectations. As a result, the outlook for future inflation declined, making the data positive news for mortgage rates. 

 
Week Ahead 
Looking ahead, major upcoming events will take place in Europe. The French election will take place on Sunday and likely will influence U.S. markets on Monday. The next European Central Bank meeting will take place on April 27. In the U.S., the Existing Home Sales report will be released on April 21, followed by New Home Sales on April 25. The first reading for first quarter gross domestic product (GDP), the broadest measure of economic growth, will come out on April 28. 

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