Economic Commentary August 2016

Mixed Week

A relatively bond friendly Fed statement and weaker than expected GDP data helped mortgage rates improve late last week. However, comments from the Bank of Japan had the opposite effect early this week. The influences were offsetting, and mortgage rates ended the week with little change.

U.S. gross domestic product (GDP), the broadest measure of economic growth, grew at a rate of just 1.2% in the second quarter, far below the consensus of 2.6%. This followed weak readings below 1.0% for the prior two quarters. Consumer spending was strong during the second quarter, but business investment was weak and inventories declined sharply. Slower economic growth reduces the outlook for future inflation, which is good for mortgage rates.

The most recent reading for the Fed's favorite inflation indicator showed that inflation is currently below the Fed's target level of 2.0% and provides little pressure to tighten monetary policy. The core PCE price index for June was just 1.6% higher than a year ago. It has held steady close to this level all year.

On Tuesday, the minutes from the July 16 Bank of Japan (BOJ) meeting were released. They revealed that some BOJ officials are beginning to question the effectiveness of Japan's massive stimulus programs, causing doubt about the willingness of the BOJ to add further stimulus. Bond purchase programs by major global central banks have helped keep U.S. bond yields low in recent years, so the minutes had a negative effect on mortgage rates.

Looking ahead, 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. Another labor market report, JOLTS, will come out on August 10. JOLTS measures job openings and labor turnover rates.

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