President Trump today said to expect an announcement about tax cuts in two to three weeks. Mortgage rates moved a little higher after the comment. There are two reasons why tax cuts are viewed as negative for mortgage rates. The first is that tax cuts increase the wealth of the affected individuals or businesses, leaving them with more money to spend. This added spending boosts economic activity, which increases the outlook for future inflation. Mortgage rates rise as expected future inflation rises, since higher inflation further erodes the value of a mortgage’s future cash flows. The second is that tax cuts increase the budget deficit, at least initially. This means that the government has to issue more Treasury bonds to fund the deficit. The added supply reduces the value of Treasuries and similar bonds, including mortgage-backed securities (MBS). A decline in MBS prices leads to higher mortgage rates.
This week, a major influence on U.S. mortgage rates will be the “Brexit vote on Thursday. It is very difficult to predict the effect on the global economy if the UK were to leave the European Union or whether it would lead to similar votes in other countries. Due to the economic uncertainty which would result, a vote for the UK to exit the EU is expected to be positive for U.S. mortgage rates, while a vote to remain would be negative. As each new poll shifts the odds, investors react immediately. This increases daily volatility, as investors factor the expected outcome into asset prices. For example, the latest poll showed greater support to remain, and mortgage rates have moved higher today.
After holding the federal funds rate near zero for seven years, the Fed announced a rate hike of 25 basis points, as widely expected. This was the first rate hike since June 2006. Investors are now asking what the pace of future rate hikes will be. According to the Fed statement, Fed officials expect that economic conditions will warrant only "gradual" increases in rates. The statement also noted that the Fed does not expect to reduce its holdings of MBS and Treasuries any time soon. Investors were pleased that the Fed does not appear to be in any rush to tighten monetary policy, and MBS prices and stocks moved a little higher. Want to see live MBS prices on the go? Check out the new look of www.mbsquoteline.com from your mobile device. All features optimized for your device. | Questions call 800-627-1077
Fed day is coming up on Thursday. The Statement will be released at 2:00 ET, and Fed Chair Yellen’s press conference will follow at around 2:30 ET. Fed members appear divided about raising the federal funds rate at this meeting. Investor expectations are mixed as well. With no apparent consensus, whatever the Fed decides will likely cause a significant reaction in the markets. More important than the decision about hiking rates may be what investors learn about the Fed’s view of the economy and how that may influence future Fed policy. What impact will this Fed meeting have on mortgage rates? The answer is not at all clear. It will depend on how the Fed’s decision and comments alter investors’ outlook for future Fed policy.
One reason that mortgage rates are so low is the expectation that the ECB will begin to buy sovereign bonds, similar to the recently completed US quantitative easing (QE) program. Economic growth in Europe has stalled, and QE is one of the most powerful tools available to the ECB to help boost growth. The expected added demand for bonds from the ECB has caused bond yields around the world to decline. However, ECB officials are divided about QE, and the decision keeps getting pushed farther into the future. Notably, the Germans are opposed. At Thursday's press conference, ECB President Draghi appeared to take another small step in favor of QE. Draghi said that the ECB intends to increase the size of its balance sheet and that it would do so even without unanimous consent. However, he also deflated hopes for quick action by saying that the ECB would not consider QE until the end of the first quarter of 2015. The net impact of his comments was a small improvement in mortgage rates.
Freddie Mac reported that average mortgage rates fell in the week through November 21, with 30-yrs hitting 4.22%, from 4.35% the prior week. While the survey results are released on Thursday, the timing of the data collection means that the data better reflects changes from Monday to Monday or Tuesday to Tuesday than Thursday to Thursday each week. The Primary Mortgage Market Survey (PMMS) is sent on Monday with a response due back by Wednesday. Most responses are completed and submitted on Monday or Tuesday. The responses are averaged and the results are released on Thursday. The survey results, therefore, reflect the average rate and points borrowers were being offered on Monday and/or early Tuesday. Changes in the market since Monday/Tuesday can make the published data misleading when compared to rates and points actually being offered on Thursday. This week, mortgage rates have increased substantially since the survey period earlier in the week. If the survey were conducted this morning, the results for 30-yr rates would show an increase of about 5 basis points from last Thursday.