Overview: While the stock market experienced little change over the past week, mortgage rates continued to increase, reaching the highest levels in years. The main influence was a comment from a central bank official in Europe. The U.S. economic data and the Federal Reserve meeting caused little reaction.
At its meeting late last week, the European Central Bank (ECB) made no policy changes, as expected. The ECB also provided very little new information in terms of guidance about future policy, and the impact on U.S. mortgage rates was minor. On Monday, however, an ECB official said that the ECB should end its bond purchases as soon as possible after the current program ends in September. The possibility of reduced demand for bonds caused global yields to rise, including U.S. mortgage rates.
Like the ECB meeting, no surprises emerged from Wednesday’s U.S. Fed meeting. Expectations for the pace of future federal funds rate hikes remained nearly the same following the meeting. Jerome Powell will officially take over as Fed Chair during the first week of February.
The major economic data released over the past week was roughly neutral for mortgage rates and had little impact. The core Personal Consumption Expenditures (PCE) Price Index, the inflation indicator favored by the Fed, remained at an annual rate of increase of just 1.5%. This is well below the Fed’s target level of 2.0%.
Gross domestic product (GDP), the broadest measure of economic growth, increased 2.6% during the fourth quarter of 2017. This was less than expected, but the shortfall was completely due to a decline in inventories. Investors generally view changes in inventory levels simply as a transfer of growth between quarters rather than as an indicator of the strength of the economy. They focused much more on the strong consumer and business spending during the fourth quarter.
Looking ahead, the Institute for Supply Management (ISM) Manufacturing Index will come out on Thursday. The key 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. The ISM Services Index will come out on February 5. The efforts to reach an agreement to fund the government after February 8 also could influence mortgage rates.