Mortgage Rates Moving as 10YR Hits 2.04%

This morning was the ECB meeting of which the banks left interest rates unchanged as expected. The main refinancing rate at zero, the deposit rate -0.4%. That puts a penalty for banks keeping money deposited. Nothing new - that has been the case for three years. The EU economies are improving, but in previous comments, Mario Draghi has worried over the continuing strength and, like our Fed, cannot understand why inflation is not increasing. The ECB inflation target is at 2.0%, the same as the Fed. A new estimate of euro area growth published by the EU statistics agency on Thursday showed that the region’s economy expanded by 2.3% in the year to June — better than previous estimates. Inflation is running at 1.5%, slightly less than US at 1.7%. Estimates from the ECB on inflation is a lower level in 2018 because of the relentlessly strong euro currency.

Weekly jobless claims increased sooner than expected because of Hurricane Harvey.  With Irma and Jose next, we could see this increase to numbers well above the 300K range and beyond.  We have been spoiled by the 250K range for the past several months. 

Q2 revisions of productivity and unit labor costs: productivity was expected at 1.3% from +0.9% on the preliminary, it increased 1.5%. Q2 unit labor costs expected to be revised from +0.6% to +0.3%, as reported +0.2%. Productivity increased more than anticipated, therefore unit labor costs were lower than forecasts.

The dollar continues to decline against the euro and yen. The dollar index is the lowest in over two years. The increase in weekly claims, Mario Draghi, left rates unchanged and continued to worry about the strength of the euro.

Everything remains technically bullish for the interest rate markets (lower rates). Much depends on how equity markets perform and that, to some extent, depends momentarily what the natural disasters do to businesses. Tax cuts still on the table, and the debt ceiling hangs over markets. Stock indexes still very overextended based on historical perspectives. Much like the inability of economists and central bankers to understand the lack of inflation, stocks are not reacting as in past rallies, also based on how markets acted in the past.

Just a bit of an add-on as I go to press at 10:30AM, the 10yr has gone down to 2.04% and MBSs have increased dramatically in the last hour.  Right now, I am not sure what is causing this reaction but stay tune for tonight’s report.