Economic Commentary for December 3rd, 2014: Rates Rise Ahead of ECB Meeting

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Bond yields in Europe moved a little higher this week, pulling U.S. bond yields and mortgage rates higher as well. U.S. economic data released this week was stronger than expected and unfavorable for mortgage rates. After reaching the best levels of the year on Friday, mortgage rates ended a little higher.

While expectations for Fed policy have held relatively steady in recent months, the outlook for European Central Bank (ECB) policy has been shifting much more rapidly. The weak performance of the economies in the Eurozone has increased the pressure on the ECB to add more stimulus. Recent comments from ECB officials have expressed growing support for larger asset purchases, which has helped bond yields around the world move lower. This week, however, investor expectations shifted a bit in the other direction, meaning that additional action may be a little farther down the road. Expectations for a delay pushed bond yields in Europe and the U.S. higher, affecting mortgage rates.

Two big U.S. economic reports released this week were stronger than expected, increasing inflationary pressures and hurting mortgage rates. The Institute for Supply Management (ISM) puts out two reports each month. One is an index measuring the services sector, which accounts for roughly 70% of the economy. The ISM Services index rose to the fourth highest reading ever. The other report measures the manufacturing sector, and this index remained near the best levels of the year. While the manufacturing sector accounts for just one-eighth of the economy, it is very sensitive to changes, making it an important indicator of the performance of the economy.

Looking ahead, the next two days could set the tone for the month. A highly anticipated ECB meeting will take place on Thursday. Investors will be looking for information about the expected timing of increased asset purchases by the ECB. The next U.S. Employment Report, the most important data of the month, will be released on Friday. The consensus forecast is for an increase of 230K jobs in November. After that, attention will turn to the Retail Sales report.

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