The big event over the past week was Thursday’s ECB meeting. The stimulus measures announced by the ECB made investors more willing to own riskier assets such as stocks, which was negative for safer assets such as bonds. The small amount of U.S. economic data released over the past week had little impact. As a result, mortgage rates ended the week higher.
The European Central Bank (ECB) added to its stimulus program to help boost economic growth and raise inflation. The actions included cutting key interest rates and increasing the size of its asset purchase program to 80 billion euros each month from 60 billion previously. Increased demand for bonds from the ECB helps keep down yields around the world, including U.S. mortgage-backed securities (MBS). These measures were essentially in line with investor expectations, however, so their effect on mortgage rates had already been factored in.
The ECB also announced other changes designed to help the banking sector, and these were unexpected. These measures made riskier assets such as stocks more appealing to investors. When investors show a preference for adding risk, they often reduce their exposure to safer assets, including MBS, which is not good for mortgage rates.
While recent readings have shown that inflation is rising, one area has continued to exert downward pressure. The cost of imported goods dropped in February for the eighth straight month. A big reason for this has been the decline in the price of oil. Even excluding oil, the cost of other imported goods has been dropping. Lower prices for imported goods reduce inflation, which is positive for mortgage rates.
Looking ahead, there will be a Fed meeting and press conference on Wednesday. No change in the federal funds rate is expected, but the comments from the Fed could have a significant impact. Before that, Retail Sales will be released on Tuesday. Consumer spending accounts for about 70% of economic output in the U.S., and the retail sales data is a key indicator. Housing Starts, Industrial Production, and CPI will come out on Wednesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, looks at the price change for goods and services which are sold to consumers.
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