Julie C. Nichols General

Hawkish Comments
Early in the week, weaker than expected economic data helped mortgage rates improve. Later in the week, however, hawkish comments from the U.S. Fed and the European Central Bank (ECB) had the opposite effect, and mortgage rates ended the week a little higher.

A key indicator of economic activity released on Tuesday fell far short of expectations. The ISM national services index declined sharply to 51.5, far below the consensus forecast, and the lowest level since February 2010. Readings above 50 indicate an expansion in the sector and below 50 a contraction.
The service sector represents about 70% of the economy, and it has been a key source of economic growth in recent years. Since slower growth reduces the outlook for future inflation, this data was positive for mortgage rates.
Loose monetary policy around the world, particularly bond buying programs, have significantly contributed to the current low level of mortgage rates. Not surprisingly, comments which support tighter monetary policy have been negative for mortgage rates. This week, investors received a damaging combination of unexpected news from both the ECB and the Fed. Some investors have been hoping for an extension in the ECB’s bond purchase program or new stimulus measures from the ECB. At Thursday’s meeting, however, these investors were disappointed, as the ECB appeared to be resistant to providing additional stimulus at this time.
On Friday, the Fed’s Rosengren, who has long supported loose monetary policy, seemed to be open to a tightening by the Fed. He said that "a reasonable case can be made" for raising the federal funds rate. Investor expectations for a rate hike at the next Fed meeting on September 21 jumped to 30% from 18% the prior day.
Looking ahead, Retail Sales will be released on Thursday. Consumer spending accounts for about 70% of economic output in the U.S., and the retail sales data is a key indicator. Industrial Production, another important indicator of economic activity, also will come out on Thursday. The Consumer Price Index (CPI), a widely followed monthly inflation report, will be released on Friday. CPI looks at the price change for goods and services which are sold to consumers. In addition, there will be Treasury auctions on Monday, Tuesday, and Wednesday.

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