Ahead of major economic news this week, it was a relatively quiet week for mortgage rates. Mixed economic data and average Treasury auction results provided little direction. As a result, mortgage rates ended the week just slightly higher.
The big economic reports this week, New and Existing Home Sales, contained mixed news relative to the consensus forecasts. While investors were expecting even better results in some areas, the performance of the housing sector remained encouraging. June Existing Home Sales held steady, close to multi-year highs, and they were 15% above the levels seen one year ago. June New Home Sales jumped 8% from May to the highest level since May 2008. This is significant because New Home Sales reflect signed contracts (Existing Home Sales measure closings), meaning that the improvement seen in June took place despite the recent rise in mortgage rates.
The reaction to recent Fed announcements has been large, and investors are attempting to anticipate what the Fed will say at its next meeting on July 31. The big question is when the Fed will begin to taper its bond purchases. The Fed is currently using two primary tools to stimulate the economy. The Fed's traditional tool is to adjust the fed funds rate, but they reached the limit for this approach when they lowered the fed funds rate to near zero in 2008. To loosen monetary policy even further, the Fed initiated its bond buying program. Recently, Fed officials have indicated that it soon may be time to scale back the program, which has caused long-term interest rates to rise. The reaction to Wednesday's Fed statement will depend primarily on whether investors expect the Fed to taper sooner versus later. Fed officials may attempt to contain any rise in long-term rates by providing firmer guidance toward a low fed funds rate for a very long time.
This week will be packed with major economic events! The next Fed meeting will take place on Wednesday. Investors are hoping to get a clearer idea about when the Fed will begin to taper its bond purchases. The biggest economic report next week will be Friday's Employment report. 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, and it will carry even more weight than normal due to how it will influence Fed policy. A close second in importance will be Wednesday's release of second quarter Gross Domestic Product (GDP), the broadest measure of economic growth. Also on the Economic Calendar, Pending Home Sales will come out on Monday. ISM Manufacturing will be released on Thursday. Core PCE inflation and Personal Income will come out on Friday. Productivity, Chicago PMI, Construction Spending, and Consumer Confidence will round out a busy week.
Weaker than expected Retail Sales data helped mortgage rates last week. Soothing comments from Fed Chief Bernanke also were a positive influence, and mortgage rates ended the week lower.
The monthly Retail Sales report measures spending by consumers, which accounts for about 70% of economic activity. Monday's report revealed that Retail Sales were higher in June than in May, but the increase was much smaller than expected. The shortfall caused economists to lower their forecasts for second quarter GDP. When economic growth indicators are below the consensus forecast, future inflation expectations are reduced, and this is favorable for mortgage rates. As has often been the case in recent months, the reaction in mortgage rates was magnified somewhat by the importance of incoming data on future Fed policy.
On Wednesday and Thursday, Bernanke answered questions before Congress in the regularly scheduled semi-annual testimony. Overall, there were no significant surprises in Bernanke's comments, but his tone was a bit more dovish than in previous communications, which helped mortgage rates. He emphasized that the Fed's bond purchases are not on a "preset course", but rather will depend on future economic data. While his comments caused investors to push back their expectations for when the Fed will begin to taper its bond purchases, the comments also added to the uncertainty about the timing, which means that mortgage rates likely will remain very volatile in coming months.
This week, Existing Home Sales will be released on Monday. New Home Sales will come out on Wednesday. Durable Orders will be released on Thursday. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. Investors also will be looking ahead to a big day on July 31 when the next Fed meeting will take place and the second quarter GDP report will be released.
