Geopolitical events overshadowed this week's economic data and Treasury auctions. Unrest in the Middle East caused investors to seek relatively safer investments such as bonds. As a result, mortgage rates ended the week lower.
The violence in the Middle East reached a much greater level this week, as Libyan leader Gadhafi fought to retain control. Uncertainty about whether the violence will spread to other nations produced a "flight to safety", which means that investors shifted funds from risky assets such as stocks to relatively safer assets such as bonds. Higher demand for bonds, including mortgage-backed securities (MBS) helped mortgage rates improve.
As a result of the unrest in the Middle East, oil prices climbed to the highest levels since October 2008. When the current crisis eases, oil prices may move lower, but many investors expect that a higher risk premium will remain in the price of oil for quite a while. Higher oil prices impact mortgage rates in two opposing ways, increasing inflation (negative) and slowing economic growth (positive). In the longer term, it's not clear which influence will have a greater impact. Shorter term, there is a risk that the flight to safety trade will reverse as tensions ease, which could push mortgage rates back to higher levels.
Also Notable:
- Fourth quarter GDP was revised lower from 3.2% to 2.8%
- Consumer Sentiment rose to the highest level since January 2008
- The inventory of unsold existing homes fell 5% in January, to the lowest level since December 2009
- The Fed's Lacker suggested that higher oil prices are not a problem for inflation expectations right now
| Week Ahead The biggest economic event next week will be the important Employment report 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. Early estimates are for a gain of 175K jobs in February. Before the employment data, Chicago PMI, Pending Home Sales, Personal Income and the Core PCE price index will come out on Monday. The ISM Manufacturing index will be released on Tuesday. The ISM Service index and Productivity will be released on Thursday. The Fed's Beige Book, Factory Orders and Construction Spending will round out the schedule. |
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