It was a volatile week for mortgage markets. Favorable news about current US inflation data and the European Central Bank was offset by increased concerns about higher future inflation. Mortgage rates ended the week with little change.
The latest figures released this week revealed that current inflation remained at historically low levels. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. In February, Core CPI was just 1.3% higher than a year ago, down from an annual rate of increase of 1.4% last month and 2.3% in February 2020.
Despite this tame report, however, some investors are worried that inflation may increase significantly later in the year. As the vaccine rollout progresses, pent up demand in areas such as travel may be unleashed, causing prices to spike. Rising inflation reduces the value of future cash flows from bonds, so it is negative for mortgage-backed securities (MBS) and thus mortgage rates.
These concerns about future inflation have caused global bond yields to climb significantly this year, but two major central banks have taken different stances on the appropriate policy response. Last week, US Fed Chair Powell acknowledged the strength but did not give any indication that the Fed intends to attempt to restrain long-term bond yields. According to Powell, increases in inflation from stronger economic activity likely will be just “transitory” in nature, and the central bank will be “patient” before changing monetary policy. By contrast, the European Central Bank (ECB) announced on Thursday that it plans to increase the pace of bond purchases “significantly” going forward to help stabilize yields and boost the economy. One reason that the ECB may feel more pressure to loosen monetary policy than the Fed is that the eurozone is projected to grow around 4% this year compared to a much stronger 6.5% estimate for the US.
Late Wednesday, Fannie Mae announced that they will limit their acquisition of loans secured by second home and investment properties to 7% of total loans. As a result, they have changed eligibility requirements for these types of loans. In addition, to limit volume and comply with the new limit, many lenders announced immediate and significant pricing adjustments for these types of loans, and it is expected that others will follow suit.
Looking ahead, investors will continue watching Covid case counts and vaccine distribution. Beyond that, Retail Sales will be released on Wednesday. Since consumer spending accounts for over two-thirds of all economic activity in the US, the retail sales data is a key indicator of growth. The next Fed meeting will take place on Wednesday, and no policy changes are expected. Housing Starts also will come out on Wednesday.
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