Election Reaction Continues

The reaction to the U.S. election remained the primary influence on mortgage rates over the past week. The U.S. economic data had little impact. Mortgage rates increased again and are near the highest levels of the year.

In the week following the election, investors adjusted their portfolios to reflect their expectations for the economy under a Trump administration. In general, they shifted assets from bonds to stocks. Under Trump, investors expect an increase in government spending, a reduction in taxes, and a reduction in regulations. One likely result of these policies would be a boost to the economy. While faster economic growth is good for stocks, it raises the outlook for future inflation, which is negative for mortgage rates. Investors are also considering that these policies may lead to a larger budget deficit. If this were to occur, the U.S. Treasury would have to issue more bonds to fund the deficit. This potential increase in supply pushed bond prices lower, including mortgage-backed securities (MBS). This, too, was bad for mortgage rates.

Following a couple of weak months over the summer, Tuesday's data revealed that retail sales increased at the strongest pace for a two-month period since early 2014. In October, retail sales, excluding the volatile auto component, exceeded the consensus by a wide margin, with an increase of 0.8% from September. In addition, the September results were revised higher. Consumer spending represents about two-thirds of U.S. economic activity and is an important component of gross domestic product (GDP).

Looking ahead, news concerning the Trump administration could continue to influence mortgage rates. The Housing Starts report and the Consumer Price Index (CPI) report will be released on Thursday. Existing Home Sales will come out November 22. New Home Sales and Durable Orders will be released on November 23. The minutes from the November 2 Fed meeting will come out on November 23 as well, but they are unlikely to change the outlook on whether there will be a rate hike at the next Fed meeting on December 14.

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