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Rates Respond to Central Banks

Friday, May 06, 2016   /   by David Monroe

Rates Respond to Central Banks

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Rates Respond to Central Banks

In April, mortgage rates responded more to the actions and comments of central bankers than to the economic data. The European Central Bank (ECB) and the U.S. Fed had opposite effects, however, and mortgage rates ended the month just a little higher.

At its previous meeting in March, the ECB announced significant new stimulus measures to help boost economic activity and inflation in the eurozone. ECB President Mario Draghi also hinted that more stimulus could be on the way. Investors responded in March and early April by pushing interest rates around the world lower in anticipation of more stimulus. At the April 21st meeting, however, the ECB chose to add no new measures, and some of the improvement in rates was reversed.

The U.S. Fed made no change in the federal funds rate at its April 27th meeting. This was expected and the Fed’s statement was similar to the last statement following the March meeting. There were a few revisions, however. In the statement, the Fed acknowledged that the labor and housing markets continued to improve, but they said that overall economic activity “appears to have slowed.” As a whole, the statement was viewed as being a little more dovish than expected, meaning that the Fed favors keeping monetary policy loose for longer. This helped mortgage rates to improve after its release.

The measures of U.S. economic activity released in April were mixed. Job gains and home sales remained strong, while some weakness was seen in consumer spending and manufacturing. The economy added 215K jobs in March, which is close to the average monthly pace seen over the past year. The unemployment rate edged up from 4.9% to 5.0%. The higher rate was mostly due to people entering the workforce, which is a sign of strength. Pending home sales, which measure signed contracts to buy previously owned homes, rose to the highest level since May 2015. On the flip side, the retail sales data showed smaller than expected gains, and consumer confidence fell a little from the prior month.

After rising significantly over the last several months, the trend for inflation may be changing. The March core PCE price index, the inflation indicator favored by the Fed, was just 1.6% higher than a year ago, down from an annual rate of 1.7% in February. The annual rate for the core consumer price index (CPI) also declined in March. Fed Chair Yellen noted that Fed officials are concerned that inflation levels in the coming months may drop further from the Fed’s 2.0% target.

Gross domestic product (GDP), the broadest measure of economic activity, grew just 0.5% during the first quarter, down from 1.4% during the fourth quarter. This continues the pattern of weak first quarter growth during the last several years. The consensus is for stronger growth during the next three quarters, resulting in growth of about 2.0% for 2016.

GDP Growth (% change)

Looking ahead, comments from global central bankers will continue to influence mortgage rates. The biggest economic report of the month will be the Employment report on May 6. This report will show the amount of job growth and to what extent wages are rising. The retail sales report on May 13 also will be important, as consumer spending accounts for 70% of the U.S. economy.

Mortgage Rates (monthly change) 0.02%
Dow (monthly change) 75