Europe Influences U.S. Markets

Week of May 1st, 2017

Over the past week, mortgage rates were influenced mainly by events in Europe.  The outcome of Sunday's French election was bad for mortgage rates, while Thursday's European Central Bank meeting was mildly positive.  The U.S. economic data had little impact.  Mortgage rates ended the week a little higher.

One pro-EU candidate (Marcon) and one anti-EU candidate (Le Pen) won the first round of Sunday's French Presidental election and will compete in the second round on May 7.  Polls indicate that Macron is heavily favored to win the second round, which reduces some concerns that France will leave the European Union.  Investors reacted by reversing the flight to safety trade which took place ahead of the election.  This means that they shifted back to riskier assets such as stocks and out of safer assets such as mortgage-backed securities (MBS).  The increased supply of MBS caused mortgage rates to rise.  

At Thursday's meeting, the European Central Bank (ECB) made no policy changes, as widely expected.  The tone of ECB President Draghi was more dovish than anticipated, however.  Some investors had worried that ECB officials might hint at a reduction in bond purchases by the ECB.  The fact that they did not was good news for mortgage rates.  

The first reading for first-quarter U.S. gross domestic product (GDP) released on Friday was 0.7%, below the consensus of 1.1%, and down from the 2.1% in the fourth quarter of 2016.  This was the slowest quarterly growth in three years.  Weak consumer spending and a decline in inventories were a couple of the primary factors in the shortfall.

These components are volatile on a quarterly basis, and many economists believe that the weakness in the first quarter simply pushed some economic activity into later quarters.  As a result, the report had little impact on mortgage rates.  






The Week Ahead

Looking ahead, it will be a packed week.  The next Fed meeting will take place on Wednesday.  No change in rates is expected, but investors will be eager for guidance on the pace of future tightening.  The key monthly Employment report will be released on Friday.  Before that, important data on inflation, manufacturing, and services will be released.  IN addition, news about policies from the Trump administration or about the French election May 7th could influence mortgage rates.  


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