A quick update on the bond and mortgage markets last week:
Over the past week, central bankers in the U.S. and Japan acknowledged the slowdown in global growth, which was positive for mortgage rates. Recent economic reports supported the outlook for slower economic growth. As a result, mortgage rates ended the week lower.
While Wednesday’s Fed statement was consistent with the message predicted by analysts, investors responded by selling stocks and buying bonds. As expected, the Fed made no change in the federal funds rate or in its reinvestment policy for its Treasury and MBS holdings. In the statement, Fed officials modestly downgraded their assessment of the performance of the U.S. economy, and they expressed less confidence that inflation is on their expected path to rise to their target level. In addition, Fed officials said that they are “closely monitoring” developments in overseas economies. Some investors had hoped that the Fed would explicitly rule out a rate hike at the next meeting in March, but the statement kept open the possibility.
Friday’s surprise move by the Bank of Japan (BOJ) was positive for global bond markets. The BOJ announced that it was cutting short-term rates to try to boost economic growth and inflation. While the BOJ made no change to its massive bond buying program, BOJ officials expressed a willingness to expand the program in the future if necessary. The BOJ announcement was favorable for U.S. mortgage-backed securities (MBS).
The two biggest U.S. economic reports released over the past week did nothing to conflict with the outlook for slower growth. Fourth quarter Gross Domestic Product (GDP) increased just 0.7%, down from 2.0% during the third quarter. For the entire year, GDP rose 2.4%, matching the level seen in 2014. Durable orders in December declined 5% from November, which was much weaker than expected.
Looking ahead, the important monthly Employment report will be released on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, the ISM national manufacturing index and the Core PCE price index will be released on Monday. Core PCE is the Fed’s preferred inflation indicator. The ADP Employment Change and the ISM national services index will come out on Wednesday.
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