Weaker than expected economic data helped mortgage rates decline to the lowest levels of the year early in the week. On Wednesday, though, a reminder that the Fed will eventually sell its portfolio of mortgage-backed securities (MBS) helped to erase the improvement. These two influences offset each other, and mortgage rates ended the week nearly unchanged.
The economic data released this week fell far short of investor expectations almost across the board. The most significant report, April Industrial Production, was unchanged from March, which was well below the consensus forecast. Manufacturing output was hurt by a shortage of parts from Japan due to the earthquakes. The Index of Leading Indicators declined for the first time since June 2010. The housing sector data also showed weakness as Existing Home Sales, Housing Starts, and Building Permits all declined in April.
The FOMC minutes from the April 27 Fed meeting contained few surprises, but they highlighted the fact that the Fed's eventual return to more normal monetary policy will include both asset sales and rate hikes. The minutes gave no indication of the timing of any Fed tightening. Longer term, officials believe that the Fed's balance sheet should contain only Treasury securities, meaning that the Fed at some point will begin to sell its roughly $1 trillion portfolio of MBS. In order to disrupt the mortgage market as little as possible, officials said that the selling may be done over a period of many years, and any asset sales would be announced far in advance.
Next week, New Home Sales will be released on Tuesday. Durable Orders, an important indicator of economic growth, will come out on Wednesday.