European Banks and Oil

A couple of global events caused a moderate amount of volatility for stocks and bonds over the past week, but the effects were offsetting. The economic data had little impact. As a result, mortgage rates ended the week with little change, remaining near the best levels of the year. 

Early in the week, it was reported that the U.S. Department of Justice was seeking a $14 billion fine from Deutsche Bank, the largest bank in Germany, for issues regarding the sale of mortgage-backed securities (MBS) before the 2008 financial crisis. While the actual fine is expected to be considerably lower, investors still are concerned about the impact it will have on Deutsche Bank's capital reserves. Bank stocks around the world declined over the past week on this issue and on overall concerns about the soundness of the European banking system. In response, investors shifted to relatively safer assets, including U.S. MBS, and the added demand caused a small improvement in mortgage rates. Most of the gains were offset later in the week, however, when it was reported that OPEC had reached an agreement on an oil production cut. This news caused investors to shift back to stocks. 

Investors often prefer to look at core inflation because it provides a clearer indication of the underlying trend. While core PCE remains steady at levels below the Fed's target of 2.0%, investors will be watching to see if the August data marks the start of a trend toward rising inflation.  

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 Construction Spending will be released on Monday. The ADP Employment Change, Factory Orders, and the ISM national services index will come out on Wednesday. 

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