Economic Commentary for August 29th, 2013: Weak Data and Syria

 

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Two factors helped mortgage rates improve over the past week. A couple of big economic reports released this week fell short of expectations. In addition, the conflict in Syria escalated, which caused investors to seek safer assets.

Most of the recent economic data has met or exceeded expectations, so investors were caught by surprise when July New Home Sales fell far short of the Wall Street forecast. Then the July Durable Orders report showed a larger than expected decline. The reaction to the data was exaggerated due to its influence on future Fed policy. Fed officials have clearly stated that the timing to begin to taper the bond purchase program will depend on the performance of the economy. If higher interest rates are causing economic growth to slow, the Fed may wait longer to begin to taper, which would be good news for mortgage rates.

This week, the conflict in Syria showed signs of escalating, and the US moved closer to more active involvement. For investors, the growing uncertainty prompted them to shift to relatively safer assets. This “flight to safety” created added demand for US bonds, including mortgage-backed securities (MBS). Since mortgage rates are largely determined by MBS prices, rates moved lower.

Investors will be keeping a close eye on events in Syria. In situations like this, significant shifts in investor sentiment can be swift. In addition, with the next Fed meeting only a few weeks away, economic announcements will be very important. In particular, the August Employment report will be released on September 6. An extreme reading in either direction could make the difference in determining the timing of the shift in Fed policy.

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