UK Votes to Exit

A shocking British vote to exit the European Union sent both stocks and mortgage rates much lower on Friday. The other economic news had little influence. As a result, mortgage rates ended the week lower, near the best levels since early 2015.

While the final polls ahead of the vote were close, the vast majority of investors expected the UK to vote to remain in the European Union. When the outcome indicated that the UK will exit the EU, the resulting uncertainty caused investors to swiftly shift to safer assets on Friday. Global stock markets sold off sharply and bond yields declined, including mortgage-backed securities (MBS). Since mortgage rates are set based on MBS prices, mortgage rates moved lower.

The British exit (Brexit) is expected to result in slower economic activity. The degree is difficult to predict. The uncertainty is heightened by the prospect of other countries in Europe proposing similar referendums. It is likely that European trade will be hindered by higher tariffs, companies will be more hesitant to hire new workers, and investors will be slower to commit capital to the region. However, this was viewed as positive for mortgage rates, since slower global economic growth reduces the outlook for future inflation. 

Looking ahead, the reaction to the British vote will continue to influence U.S. mortgage rates. In the U.S., the third estimate for first quarter GDP will be released on Tuesday. The report on pending home sales and the core PCE price index will come out on Wednesday. Core PCE is the favorite inflation indicator of the Fed. The ISM national manufacturing index will be released on Friday. Mortgage markets will close early on Friday in observance of July Fourth. 

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