Mortgage rates have been on an upward path this year, and the trend continued this week. With the rollout of the Covid vaccine and additional government stimulus on the way, most investors expect to see a surge in economic activity. As a result, mortgage rates ended the week at their highest levels in months.
Bond yields have gone up rapidly this year mostly due to an improving outlook for economic growth, which increases inflationary pressures. Both the government and the Fed are providing massive amounts of stimulus to boost the economy, and the vaccine rollout is expected to unleash enormous pent-up demand in hard hit areas such as travel. In addition, the Treasury must issue bonds to fund the extra government spending, and this added supply causes yields to rise.
The reduced economic activity resulting from the pandemic caused a significant decline in inflation last year, which was one of the factors responsible for record low mortgage rates. However, investors are now concerned that inflation may be heading higher. In January, the core PCE price index was 1.5% higher than a year ago, which was above the consensus forecast, and up from an annual rate of increase of 1.4% last month.
During his semi-annual testimony this week, Fed Chair Powell suggested that easy monetary policy will remain in place for a while since the economy is “a long way from our employment and inflation goals.” In particular, he noted that the economy still needs to recover 10 million jobs lost due to the pandemic. While investors are concerned about rising inflation, Powell appeared to be less worried. He said that we might see higher inflation later this year as a result of pent-up demand, but that most of the increase would be just temporary. According to Powell, Fed officials project that it could take three years for inflation to sustainably rise to their target levels.
Looking ahead, investors will continue watching Covid case counts, vaccine distribution, and the size of the government stimulus spending bill. Beyond that, the monthly Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, the ISM national manufacturing index will come out on Monday and the ISM national services index on Wednesday.
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