Overview: Over the past week, the major U.S. economic data was weaker than expected overall, and the European Central Bank (ECB) provided favorable news for mortgage rates. As a result, rates ended the week lower.
After several strong months, Friday's key monthly Employment Report missed the target for job gains. The economy added just 20,000 jobs in February, significantly below the consensus for an increase of 175,000. Bad weather likely was one major factor behind the shortfall, as weakness was seen in the construction sector, as well as the leisure and hospitality sector. Since slower economic growth reduces the outlook for future inflation, this was good news for mortgage rates.
The latest news on current inflation levels was mixed. Wage growth in February was stronger than expected, as average hourly earnings were 3.4% higher than a year ago, up from 3.2% the prior month. This was the highest level since April 2009. On the other hand, a broader measure of inflation fell short of the expected levels. The Consumer Price Index (CPI) is a widely followed monthly report that looks at the price change for goods and services. In February, core CPI, which excludes the volatile food and energy components, was just 2.1% higher than a year ago, down from an annual rate of increase of 2.2% last month.
In response to a reduced outlook for European economic growth, the ECB shifted toward a more dovish (in favor of looser monetary policy) stance at Thursday’s meeting. It extended the minimum period for which it will not raise benchmark rates by several months to the end of 2019 and announced a new batch of low-cost, long-term loans to banks. The inexpensive bank funding is intended to encourage more lending, which would boost economic activity. The ECB substantially lowered its forecast for gross domestic product (GDP) growth in 2019 from 1.7% to 1.1%. Global bond yields, including U.S. mortgage rates, declined as a result of these favorable changes.
Looking ahead, the next Federal Reserve meeting will take place on March 20. Investors do not expect the Fed to raise rates, but they will be looking for guidance about future monetary policy. Before that, the New Home Sales report, which was delayed by the government shutdown, will be released on Thursday. In addition, the Job Openings and Labor Turnover Survey (JOLTS) report will come out on Friday. Fed officials value this data to help round out their view of the strength of the labor market. The New Residential Construction report (also known as Housing Starts) will be released on March 19.