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Dramatic Stock Market Movement Barely Moves Rates

February 7, 2018

 

Overview: Over the past week, mortgage rates were driven by two primary factors: a massive decline in the stock market, which was positive for rates, and an increase in the outlook for future inflation, which was negative. The net effect was a small increase in mortgage rates.

What some are calling a long overdue correction in the stock market began on Friday and continued through Monday. The Dow lost over 1,800 points during those two days, before recovering almost 600 points on Tuesday. Typically, bond markets (and thus mortgage rates) benefit when stocks decline, since investors shift between the two asset classes. This traditional pattern was followed on two of the three days of enormous stock market swings, as mortgage rates fell on Monday and rose on Tuesday. But Friday was a different story.

 

On Friday, another factor outweighed the stock market as the primary influence on mortgage rates. The key Employment Report increased concerns about higher future inflation. Job gains in January were right in line with the expected levels (after factoring in revisions to the results for prior months). The surprise came from stronger than expected annual wage growth. Average hourly earnings in January were 2.9% higher than a year ago, an increase from the upwardly revised annual rate of 2.7% in December. This was the highest level in eight years. Other than the two months distorted by the hurricanes, wage growth held steady around 2.5% for most of 2017. Rising wages eventually put upward pressure on overall inflation levels in the economy, which is negative for mortgage rates. As a result, rates moved higher on Friday in spite of the massive stock market losses.. 
 
Week Ahead 

Looking ahead, the Retail Sales report and Consumer Price Index (CPI) will be released on February 14. Consumer spending accounts for about 70% of economic activity in the U.S., and the retail sales data is a key indicator. The CPI is a widely followed monthly inflation report that looks at the price change for goods and services. The New Residential Construction report (also known as Housing Starts) will come out on February 16.

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