Bad news last week was good news for mortgage rates. A higher likelihood for further Fed easing and increased concerns about Spain helped mortgage rates improve to new record low levels.
Based on weaker than expected economic data and comments from Fed officials, investors have increased their expectations for a third round of quantitative easing (QE3) to boost the economy. The Retail Sales and manufacturing data released this week continued a string of recent reports reflecting slowing economic activity. Fed Chief Bernanke testified to Congress on Tuesday and Wednesday, acknowledging both a slow pace of economic growth and an unusually high level of uncertainty in the outlook. Investors believe that QE3 likely would consist of additional purchases of mortgage-backed securities (MBS) by the Fed. Since mortgage rates are largely determined by MBS prices, expectations for QE3 have been good for mortgage rates.
Many of the same issues experienced by Greece are now being seen in Spain. Spain passed additional austerity measures during the week, causing violent protests from the people affected by the spending cuts. Spain has the fourth largest economy in the euro zone, though, and its fate will have a much larger impact on the future of the European Union (EU) than Greece. The cost of a bailout for Spain would be enormous, but it’s hard to predict the severe consequences of a default by Spain. Investors reacted to the uncertainty by shifting to relatively safer assets, including US MBS.
The biggest economic report this week will be Friday’s release of second quarter Gross Domestic Product (GDP), the broadest measure of economic growth. Before that, New Home Sales will come out on Wednesday. Durable Orders and Pending Home Sales will be released on Thursday. Consumer Sentiment is also scheduled for Friday. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday.
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