Rates Improve on Overseas Issues

Overseas events were positive for mortgage rates during the first week of the year. The events included geopolitical tensions in North Korea and the Middle East as well as signs of slowing growth in China. Mortgage rates ended the week lower. 

Several events caused investors around the world to shift their holdings to safer assets. On Monday, Saudi Arabia cut diplomatic ties with Iran, raising tensions between these two major powers in the Middle East. On Wednesday, North Korea announced that it had successfully tested a hydrogen bomb. Weaker than expected economic data in China released this week also was positive for mortgage rates. Investors are worried that China's economy may be slowing more quickly than had been expected. Investors reacted to these events by reducing the risk in their portfolios, primarily by selling stocks and buying bonds, including U.S. mortgage-backed securities (MBS). The increased demand for MBS causes mortgage rates to decline.

Surprisingly strong job gains often cause mortgage rates to move higher. However, there was little net change in rates after this report. One reason is that average hourly earnings, an indicator of wage growth, fell short of expectations with a flat reading. The lack of wage inflation was positive news for mortgage rates.

Looking ahead, additional labor market data, the JOLTS report, will come out on Tuesday. JOLTS measures job openings and labor turnover rates. Retail Sales and the Producer Price Index (PPI) will be released on Friday. Consumer spending accounts for about 70% of economic output in the U.S., and the retail sales data is a key indicator. There will be Treasury auctions on Tuesday, Wednesday, and Thursday. Investors also will be watching for signs of escalation concerning the Middle East.

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