Economic Commentary for January 3rd, 2014: Quiet Holiday Period

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It was a quiet last half of December. There was little economic news and light trading volume. The majority of the economic data exceeded expectations, but had little impact on mortgage rates.

On December 18, after months of investor speculation, the Fed announced that it will begin to scale back its bond purchases. The added demand for mortgage-backed securities (MBS) from the Fed has been a major factor helping to keep mortgage rates low, so a reduction is clearly negative news for mortgage markets. However, there has been very little change in mortgage rates since the announcement, demonstrating that the Fed successfully communicated its intentions to investors.

Strength in the labor market, housing, manufacturing and other areas helped convince Fed officials to taper at this time. The economy has added an average of nearly 200K jobs over the past three months. Third quarter GDP growth rose to 4.1% from 2.5% in the second quarter, which is the broadest measure of economic growth. While some of the increase in GDP was due to a buildup in inventories, investors and Fed officials are optimistic that we are entering 2014 with a solid pace of improvement in economic activity.

The next major economic data will be the December employment report, which will be released on January 10. After that, the Retail Sales and Housing figures will receive the most attention from investors. The next Fed meeting will be on January 29. Also notable, a new Director of the Federal Housing Finance Agency (FHFA), Mel Watt, is scheduled to be sworn in on January 6. Mr. Watt’s policies are expected to be more accommodating to housing finance than those of outgoing acting Director Edward DeMarco.

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