Economic Commentary for August 8th, 2013: Little Change after Major Data

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Mortgage rates continue to be driven by expectations for future Fed policy. Since the Fed has emphasized that its decisions will be based on incoming economic data, this week’s reports caused significant swings in rates. The major data moved rates in opposite directions, and mortgage rates ended with little change.

The last Fed statement and recent speeches from Fed officials have expressed a consistent message. The Fed is planning to begin to taper its bond purchase program later this year. The added Fed demand for bonds helped mortgage rates decline over the years, and the rise in rates over the last couple of months was mostly due to the prospect of tapering. Investors anticipate that it will begin in September or October. Due to the importance of incoming data on Fed policy, the market reaction following the release of economic reports has been exaggerated.

The two major economic reports released over the past week demonstrated this increased level of volatility. ISM Manufacturing was stronger than expected, and mortgage rates swiftly moved higher. The July Employment data came in a little below the consensus and mortgage rates improved. In this case, the two reports roughly offset each other, and the net effect of the two large price swings was minor.

Looking ahead, every economic report will be carefully considered for its influence on Fed policy. The data on Retail Sales and Home Sales will be the most highly anticipated over the next couple of weeks. Inflation has held at low levels this year, but any surprises in the CPI and PPI reports could have a large impact. Investors also will be looking to speeches by Fed officials for additional clues about when the Fed will begin to taper.

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