A shift in expectations toward a faster pace of tightening by the Fed was negative for mortgage rates this week. Stronger than expected economic data also was unfavorable. As a result, mortgage rates ended the week higher.
This week, speeches by several Fed officials were more hawkish than expected. This caused investors to expect a faster pace of monetary policy tightening. Futures markets now price in about a 75% chance of a federal funds rate hike at the next Fed meeting on March 15, up from just a 25% chance a week ago. While the federal funds rate is more highly correlated with short-term yields than with long-term yields such as mortgage rates, a faster pace of tightening is bad for mortgage rates because it likely means that the Fed will begin to reduce its holdings of mortgage-backed securities (MBS) sooner. Fed purchases of MBS have helped mortgage rates move lower in recent years, so the shortened expected timeline for reduced demand from the Fed caused mortgage rates to rise.
One reason that Fed officials may be inclined to hike rates this month is that recently released economic data has generally continued to surpass expectations. Since the election, both consumers and businesses appear to be more optimistic about the economic outlook. The February measure of Consumer Confidence from the Conference Board rose to the highest level since 2001.
The ISM national manufacturing index increased to 57.7, the highest level since August 2014. Readings above 50 indicate an expansion in the sector. As recently as August, the index was below 50. The ISM national services index also rose more than expected to 57.6, the best reading since April 2015. Stronger economic activity raises future inflationary pressure, which is bad for mortgage rates.
Looking ahead, there will be a European Central Bank (ECB) meeting on Thursday. No policy changes are expected, but guidance about the outlook for future policy could influence U.S. markets. In the U.S., the important monthly Employment report will be released on Friday. As usual, this report on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday.
source: Mortgage Time Newsletter