Market Recap - Week Ending December 17, 2010

It was another tough week for mortgage rates. Tuesday's Fed meeting contained no surprises, so investors focused on stronger than expected economic growth data and progress on the tax deal, which was passed late in the week. Once again, nearly all the news was unfavorable for mortgage rates, which ended the week higher.

Recent economic growth data has mostly exceeded expectations, causing several economists to raise their forecast for GDP in 2011. In particular, this week's Retail Sales and manufacturing sector data surpassed the consensus estimates. Faster economic growth generally produces higher future inflation expectations, which leads to higher bond yields.

The tax deal has been negative for mortgage rates in three ways. First, it's expected to boost economic growth. In addition, it will increase the budget deficit, which will lead to a larger supply of Treasury securities, pushing bond yields higher. Finally, this additional fiscal stimulus will make it less likely that the Fed will add more monetary stimulus. That said, the Fed is focused on unemployment that is far too high and inflation that is below its desired level. At this point, the Fed is in no rush to begin to tighten policy.

Next week, the final revisions to third quarter Gross Domestic Product (GDP) will be released on Wednesday, along with Existing Home Sales. Thursday will be the big day with Personal Income, Durable Orders, New Home Sales, Jobless Claims, and Consumer Sentiment. Mortgage markets will close early on Thursday and will be closed on Friday in observance of the Christmas holiday.


Market Recap - Week Ending December 17, 2010