ECB Spooks Investors – May 2018 Edition

The market moving economic news this week again was viewed as negative for mortgage rates. This time the source was the European Central Bank (ECB). The U.S. economic data mostly came in on target and caused little reaction. Mortgage rates reached the highest levels in seven years.

On Monday, a speech from a top ECB official was viewed by investors as unexpectedly hawkish, meaning in favor of tighter monetary policy. Galhau, the governor of the Bank of France, said that the ECB might soon provide guidance about the timing of its first rate hike in years. While investors anticipate that the ECB will end its bond buying program later this year, they were somewhat surprised by the talk about rate hikes, and some investors viewed his speech as opening the door for rate hikes to take place sooner than expected. Bond yields around the world moved higher after the speech, including U.S. mortgage rates.

Next to the Employment data, the report on retail sales is one of the most closely watched each month. Consumer spending accounts for about 70% of economic activity in the U.S., and the retail sales data is a key indicator of growth. Following the hurricanes, retail sales showed very strong gains for three months last fall.

Sales then unexpectedly posted three months of losses, causing investors to worry that economic growth was slowing. However, the most recent data released this week showed a healthy increase in April of 0.3% from March. Combined with the solid gains seen in March, it appears that the three weak months were not indicative of a longer-term trend.

Looking ahead, New Home Sales will be released on Wednesday and Existing Home Sales on Thursday. Durable Orders, an important indicator of economic activity, will come out on Friday. In addition, Treasury auctions on Wednesday and Thursday could influence mortgage rates.

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