Mortgage rates registered some upward movement last week after the release of third quarter U.S. GDP data and the October employment report.
GDP (Gross Domestic Product), the measure of U.S. economic output, grew 2.8 percent in the third quarter. The number came in above economist’s projection of 2.0%. Expectations were muted after the U.S. government shutdown, quantitative easing uncertainty (we will come back to this in a moment), and mixed economic data.
A “healthy” pace of growth would be about 3.0%, and though the headline number is approaching that baseline, the underlying data isn’t as strong. The Wall Street Journal noted that economic progresses “continued to plod along,” as “businesses cut investments and consumers moderated their spending.”
The 2.8% growth primarily represented a “one-time buildup of inventory,” without which the rate would be 2%. The U.S. economy continues to remain “stuck” at this 2% pace over the past four years, and we seem to be moving from crisis to crisis – European debt, U.S. government gridlock (debt ceiling, budget shutdown), and more.
Aided by the Federal Reserve’s quantitative easing (QE) program, the recovery – though slow – has moved forward. QE in particular has helped the housing market recover by lowering interest rates. The most recent iteration of QE (3) has included a $40 billion per month in mortgage bond purchases. Movement in the mortgage bond market affects mortgage rates, and by guaranteeing a source of demand for bonds, the Fed has been able to keep rates low.
(Mortgage rate movement is more complicated than that simple metric, but a general way to look at it is this: when the U.S. bond market – specifically mortgage bonds – is active with demand, mortgage rates feel downward pressure. U.S. bond markets tend to get more activate in times of economic uncertainty, when investors look for a safer bet.)
The U.S. economy added 204,000 jobs in October, which was about 25% stronger than expected (economist consensus was in the mid-100,000s). The jobless rate ticked up to 7.3%, but this number was affected by temporarily furloughed government workers during the shutdown.
Investors took the report well, and the market recovered from Thursday’s post-GDP slide. Of particular relevance for mortgage rates, the positive report renewed speculation that the Fed could “taper” QE by early-2013.
Mortgage rates jumped after the report came out. Less Fed activity in the bond markets means higher rates, and investors began to prepare for that eventuality.
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