Lowest Rates of the Year
Early in the week, an agreement to raise the US debt ceiling was reached, avoiding a default on government debt, but investors found little time for relief. Concerns about debt problems in Europe and the slow pace of global economic growth sparked a large rally in US bond markets and a large decline in the stock market. Mortgage rates improved significantly during the week, ending at the lowest levels of the year.
This week’s bond market rally dropped mortgage rates back to levels last seen in November, which is not too surprising since the economic environment is now similar to that time period. The economic outlook is for below average economic growth with low inflation. Slower economic growth reduces inflationary pressures, which is favorable for bonds. In addition, the possibility that the debt problems in Europe will spread to larger countries such as Spain and Italy is causing some investors to shift out of riskier assets and into relatively safer assets such as US government bonds.
Mortgage rates would have improved even more this week if Friday’s Employment report had not exceeded expectations. Against a consensus forecast of 85K, the economy added 117K jobs in July, and the data for May and June was revised higher by 56K. The Unemployment Rate unexpectedly declined to 9.1% from 9.2% in June. Average Hourly Earnings, a proxy for wage growth, increased at a 2.3% annual rate, which was higher than the consensus forecast. In short, the data solidly surpassed investor expectations in nearly every area.