Last week, the effects on mortgage rates from increased optimism about Europe and stronger than expected US economic data were offset by increased expectations for additional Fed purchases of mortgage-backed securities (MBS). As a result, mortgage rates ended the week with little change.
Global actions taken last week increased optimism that the European debt situation will improve. On Wednesday, major central banks around the world announced a joint program to lower the borrowing costs for banks. This will increase liquidity and decrease the risk of failures. China also lowered rates for the first time in three years. It appears that central bankers in Europe and China are becoming more willing to risk higher future inflation to spur economic growth. In addition, comments from the head of the European Central Bank (ECB) and from the leader of Germany suggested that if euro zone governments reach agreement on a “new fiscal compact” to better control their budgets, then the ECB may provide more aid.
Capping off a week of generally stronger than expected economic data, Friday’s Employment report also exceeded expectations in nearly every area. Against a consensus forecast of 130K, the economy added 120K jobs in November, but revisions to prior months added an additional 72K jobs. The big surprise came from the Unemployment Rate. Expected to remain unchanged at 9.0%, the Unemployment Rate dropped sharply to 8.6%, the lowest level since March 2009. The news was not quite as impressive as the headline number might suggest, though, as a good portion of the decline resulted from a decrease in the labor force participation rate, meaning that many people stopped looking for work.
This week will be a light one for economic data. ISM Services and Factory Orders will be released on Monday. The Trade Balance and Consumer Sentiment will come out on Friday. In addition, investors will be eager to hear the results from Friday’s euro zone summit.
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