A hint of a taper in the European Central Bank’s (ECB) bond purchase program drove European yields higher last week, and U.S. yields followed. The U.S. economic data caused little reaction and mortgage rates ended the week higher.
In today’s global markets, a change in bond yields in one major region often produces a similar change in other markets. Comments from the ECB caused investors to expect tighter monetary policy sooner than expected, which resulted in an increase in bond yields around the world. In particular, ECB President Draghi hinted that the ECB may start to wind down (or taper) its massive bond purchase program relatively soon as the economy improves. The ECB currently buys 60 billion euros (about $68.5 billion) of bonds each month. This added demand from the ECB has helped push global bond yields lower, including U.S. mortgage-backed securities (MBS). As a result, the increased probability that this demand from the ECB will decline was negative for mortgage rates.
In contrast to the ECB, the U.S. Fed is well along the path to tighter monetary policy. However, the Fed is facing a bit of a dilemma. Fed’s stated target for inflation is 2.0%. Last year, it appeared that inflation was slowly climbing to that level, as Fed officials had forecasted. Although this year inflation has reversed direction. Friday’s release of the core PCE price index (the inflation indicator favored by the Fed) showed that in May it was just 1.4% higher than a year ago, down from a year-over-year rate of 1.8% just three months ago. While many Fed officials believe that the decline in inflation this year is due to temporary factors, recent comments indicate that some officials would prefer to wait and see if this is true before further tightening monetary policy.
Looking ahead, the important 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 and CAN be a big “rate mover”. The minutes from the June 14th Fed meeting will come out on Wednesday, these detailed minutes provide additional insight into the debate between Fed officials.
Please reach out if you have any questions in regards to this, or if there is anything we can do for you and your valued clients.
Thank you for your continued support, have a productive week.
SVP, Regional Manager
THE CRAWFORD TEAM
V.I.P. Mortgage, Inc.