Overview: The upward momentum in global bond yields, which followed hawkish comments from the European Central Bank (ECB), continued over the past week. The U.S. manufacturing data was also negative for mortgage rates, and rates ended the week higher.
Last week, comments from the ECB caused investors to expect the ECB to scale back its bond purchase program sooner than anticipated. The possibility of a reduction in demand from the ECB was viewed as bad news for global bonds, including U.S. mortgage-backed securities (MBS). This started an upward trend in mortgage rates that has continued this week.
On Monday, the Institute for Supply Management (ISM) reported that its Manufacturing Index unexpectedly jumped to 57.8 from 54.9, which was the highest reading since August 2014. Readings above 50 indicate an expansion in the sector. Fifteen out of 18 industries reported growth in June, and the employment component of the report rose to the highest level since 2011. Since stronger economic growth raises the outlook for future inflation, this data was negative for mortgage rates.
The detailed minutes from the June 14 Fed meeting, which were released on Wednesday, contained no major surprises and had little impact. As Fed officials have made clear in their recent comments, they debated at the meeting about whether the unexpected decline in inflation over the last few months is just a short-term event or a longer-term one. Fed officials also had different opinions about announcing a start to the Fed’s balance sheet reduction “within a couple of months” or waiting until later in 2017. Given the minutes and recent comments from officials, investors think that the most likely outcome is that the Fed will announce the beginning of the balance sheet reduction in September and will not consider hiking the federal funds rate again until December.
Looking ahead, the ISM Services Index will come out on Thursday. The important monthly Employment Report will be released on Friday. As usual, this data on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Fed Chair Yellen will be testifying before Congress on July 12. In addition, there will be Treasury auctions on July 11, 12, and 13.