European Union Continues To Influence US Mortgage Rates

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New Poll Supports UK Exit

While the economic data released over the past week had little impact, an unexpected development in Europe caused a reaction. Investor expectations for the UK to vote to leave the European Union increased. This was viewed as positive for mortgage rates, and they ended the week lower.

A new poll released Tuesday reported stronger support in the UK to leave the European Union (EU) than in prior polls. Before the latest poll, investors assigned a low probability that the vote would be in favor of "Brexit," meaning that Britain would exit the EU. Now the odds have increased in the eyes of investors. A Brexit likely would increase the level of uncertainty in global financial markets and could slow global economic growth, both of which would favor safer assets such as bonds, including U.S. mortgage-backed securities.

The major economic data released over the past week exceeded expectations and supports the Fed's case for tighter monetary policy. Following a very strong reading for contracts signed to buy newly built homes in April, the Pending Home Sales Index, which measures the number of contracts signed to buy previously owned homes, jumped in April by 5% from March. This was the highest level since February 2006. Consumer spending in April also showed a large improvement with an increase of 1.0% from March. The manufacturing and durable orders data also revealed upside surprises.

The recent strong data has raised investor expectations for economic growth during the second quarter. Following a revised growth rate of just 0.8% during the first quarter, early estimates are for GDP growth of 2.7% during the second quarter, according to the latest CNBC survey.

Looking ahead, there will be a European Central Bank (ECB) meeting on Thursday. Several recent ECB meetings have had an impact on U.S. mortgage rates. The important monthly Employment report will be released on Friday. As usual, this data on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. The ISM national services index also will come out on Friday.



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