Market Commentary – 9/13/14

Increased concerns that the Fed will raise the fed funds rate more quickly than previously expected was the driving factor for mortgage rates this week. Stronger than expected economic data was another negative factor, and mortgage rates ended the week higher.

A report from the San Francisco Fed released this week caused investors to question their outlook for future Fed policy. The report called attention to a discrepancy between investor expectations for the pace of fed funds rate hikes and the forecasts from Fed officials themselves. In short, the report points out that Fed officials are less dovish than investors think. There is growing concern that next week’s Fed announcement will open the door to a fed funds rate hike sooner than previously expected. Highly accommodative monetary policy has helped keep mortgage rates low in recent years, so the prospect of tighter policy was unfavorable news.

Retail sales account for roughly 70% of economic activity, making them an important indicator of the strength of the economy. Last month, the Retail Sales report for July fell short of expectations with a disappointing flat reading from June. The Retail Sales report released this week revealed a solid increase of 0.6% in August from July, matching the consensus forecast.

The surprise came from a significant upward revision to the flat reading in July. Instead of stalling in July, Retail Sales actually continued to improve at a moderate pace. Unfortunately, stronger economic growth is negative for mortgage rates, as it increases future inflationary pressures.