Economic Commentary for October 3rd, 2014: Economic Data Helps Mortgage Rates

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The U.S. economic data released this week was generally weaker than expected, which was favorable for mortgage rates. The data also fell short in Europe. As a result, mortgage rates ended the week lower.

Slower economic growth reduces future inflationary pressures, which is positive for mortgage rates, and most of the economic data released this week fell short of the consensus forecasts. The two biggest monthly manufacturing reports, ISM and Chicago PMI, both showed larger than expected declines. Construction Spending had been expected to rise modestly, but instead showed a moderate drop. Similarly, Pending Home Sales posted a decline instead of the forecasted increase, although they remain near the best level of the year.

The data from Europe was favorable for mortgage rates as well. Euro zone manufacturing activity in September declined to the lowest level since July 2013. Inflation rates in the euro zone dropped to multi-year lows. This data increases the pressure on the European Central Bank (ECB) to add more monetary stimulus to boost economic activity. Increased asset purchases from the ECB would add demand for fixed income assets around the world, including U.S. mortgage-backed securities (MBS).

Looking ahead, there are two major events in the days ahead. The ECB announcement will come out on Thursday and investors expect that the ECB will increase its asset purchases at this meeting or in the near future. The key Employment Report will be released on Friday and is almost always a market mover. The consensus forecast is for an increase of 215K jobs in September, following the surprising dip to just 142K last month. These two events could set the tone for the mortgage market until the next Fed meeting on October 29. 

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