With long-term bond yields at or near record low levels following the Brexit vote on June 23, investors decided this week that stocks had become relatively more attractive than bonds. Investors shifted assets from bonds to stocks, pushing the Dow to a record high, and mortgage-backed securities (MBS) prices lower. Since mortgage rates are set based on MBS prices, rates moved higher. Mortgage rates still remain significantly lower than they were before the Brexit vote and Friday's events in Turkey caused investors to seek the safe haven of government securities reversing early morning losses in MBS. We expect to see continued support keeping interest rates low going into next week as the geopolitical events in Turkey unfold.
The recent increase in mortgage rates has occurred despite little change in the outlook of investors for future Fed policy. Numerous Fed officials made speeches over the past week, and the central theme was that federal funds rate hikes will take place at a very gradual pace. In futures markets, investors have priced in less than a fifty percent chance of a rate hike during the remainder of 2016.
Partly due to the pickup in consumer spending, second quarter Gross Domestic Product (GDP), the broadest measure of economic growth, is expected to more than double the 1.1% level seen during the first quarter.
Looking ahead, most of next week's economic data will come from the housing sector. The NAHB housing confidence index will come out on Monday. Housing Starts will be released on Tuesday. Existing Home Sales and the Philly Fed regional manufacturing index will come out on Thursday. In addition, there will be a European Central Bank (ECB) meeting on Thursday which could influence U.S. mortgage rates.
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