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Tensions With North Korea Move Rates Lower

August 9, 2017

 

Overview: Rising tensions with North Korea benefited mortgage rates over the past week. Mixed economic data was roughly offsetting. As a result, mortgage rates ended the week slightly lower.

On Wednesday, the dialogue between the U.S. and North Korea grew more confrontational, increasing concerns that the situation could escalate. This caused a “flight to safety,” and investors shifted from riskier assets, such as stocks, to relatively safer ones, including mortgage-backed securities (MBS). The added demand for MBS helped mortgage rates move lower. If the situation grows more serious, there will likely be a further flight to safety, while investors will probably shift back to riskier assets if tensions ease.

 

Slower than expected growth in the services sector caused mortgage rates to fall on Thursday. The July Institute for Supply Management (ISM) Services Index fell to 53.9, which was well below the consensus and the lowest level since August 2016. However, two stronger than expected labor market reports from the Bureau of Labor Statistics released on Friday and on Tuesday had the reverse effect. The first — Nonfarm Payrolls — showed that a net of 209,000 additional people were employed in July. The second — the Job Openings and Labor Turnover Survey (JOLTS) report — revealed that the number of unfilled jobs surged to 6.2 million, which was a record high. A larger number of job openings is viewed as a sign of strength for the labor market. Weak growth is good for mortgage rates because it lowers the outlook for future inflation, while the opposite is true for economic strength.  
 
Week Ahead 

Looking ahead, investors will be keeping an eye on the situation with North Korea. In addition, the Consumer Price Index (CPI), a widely followed monthly inflation report that looks at the price change for goods and services that are purchased by consumers, will come out on August 11. The Retail Sales report will be released on August 15. Consumer spending accounts for about 70% of economic activity in the U.S., and the retail sales data is a key indicator. Finally, the Housing Starts report will be released on August 16.

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