Emerging Markets, Neutral Data

Overview: Over the past week, the major economic data was roughly neutral for mortgage rates, while increased concerns about economic troubles in emerging markets was positive. As a result, mortgage rates ended the week lower..

For several years, economic conditions in Turkey have been getting worse, due to government policy decisions, U.S. Federal Reserve rate hikes, and other factors. The value of its currency has been steadily declining and inflation levels have been rising. People in Turkey have been hoarding gold as a safe store of value. Adding to the problems, the Trump administration has threatened to increase tariffs on Turkey in response to the Turkish detention of an American pastor. While many of the issues appear to be specific to Turkey, investors are concerned that the economic troubles may spread to other emerging-market countries. As a result, investors have shifted from riskier assets such as stocks to safer assets such as bonds, including U.S. mortgage-backed securities (MBS). This added demand for MBS has helped push mortgage rates lower.

Wednesday’s report on retail sales showed continued solid growth. Since auto sales are volatile month to month, most investors look at the data excluding the auto component to better judge the underlying trend. In July, retail sales ex-auto rose 0.6% from June, well above the consensus forecast of just 0.3%. The results for June were revised lower, however, offsetting the outperformance seen in July, and overall the report was viewed as roughly neutral for mortgage rates.

The most recent data revealed that inflation has continued to rise over the last several months. The core Consumer Price Index (CPI), which excludes the volatile food and energy components, was 2.4% higher in July, up from an annual rate of increase of 2.3% in June. This matched the consensus forecast and was the highest level since September 2008.

Week Ahead

Looking ahead, the New Residential Construction report (also known as Housing Starts) will be released on Thursday. The minutes from the August 1 Fed meeting will come out on August 22. These detailed minutes provide additional insight into the debate between Fed officials about future monetary policy and have the potential to move markets. The Existing Home Sales report will be released on August 22, followed by New Home Sales on August 23. The Durable Goods report, an important indicator of economic activity, will come out on August 24.