Amid all the turmoil surrounding the US debt ceiling talks, weaker than expected economic data and increased concerns about Europe helped mortgage rates improve this week.
A lack of progress in the debt ceiling talks has left investors with a high level of uncertainty, causing a great deal of volatility in mortgage markets. The current debt ceiling will be reached soon, but this time around many lawmakers from both parties are reluctant to raise the limit without an agreement to control the deficit. The two parties have been unable to reach a compromise on spending cuts and tax reform, though. Investors doubt that lawmakers would actually allow the US to default on its debt, but the US is at risk of a downgrade of its credit rating if a credible fiscal plan is not passed. As this is uncharted territory, investors don't know how large the impact of a downgrade would be on bond markets.
Due to the economic troubles in Europe, the earthquake in Japan, and the rise in oil prices, investors knew that US economic growth during the first half of the year was slower than forecast at the beginning of the year. Still, Friday's report on Gross Domestic Product (GDP) was a shock. Second quarter GDP increased 1.3%, which was well below the consensus forecast of 1.8%. In addition, first quarter GDP growth was revised lower to just 0.4% from 1.9%. Fortunately, the consensus outlook is for faster economic growth during the second half of the year.
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