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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.

Also Notable:
  • The June Core PCE inflation index was a tame 1.3% higher than one year ago
  • The Bank of Japan intervened to weaken the Japanese Yen
  • The Dow stock index dropped to the lowest level since March
  • Oil prices fell to $85 per barrel, the lowest level since February
unemployment rate from August 2008 to August 2011
Week Ahead
The biggest economic event next week will be Tuesday’s Fed meeting. Given the large stock market decline this week and the uncertainty about the economy, investors will be looking for indications on whether the Fed will provide additional monetary stimulus. The most significant economic data will be Friday’s Retail Sales report, as Retail Sales account for about 70% of economic activity. Beyond that, Productivity, the Trade Balance, and Consumer Sentiment will be released. In addition, the Treasury will auction $72 billion in 3-yr, 10-yr, and 30-yr securities on Tuesday, Wednesday, and Thursday.


Roger Odoardi

Roger is an owner and licensed Loan Officer at Blue Water Mortgage. He graduated from the University of New Hampshire’s Whittemore School of Business and has been a leader in the mortgage industry for over 20 years. Roger has personally originated over 2500 residential loans and is considered to be in the top 1% of NH Loan Officers by leading national lender United Wholesale Mortgage.