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Mortgage Update 7.5.16

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Blog by Doug Ingersoll | July 5th, 2016

From Stuart Crawford at VIP Mortgage:
The British vote to exit the European Union remained the primary influence on U.S. financial markets over the past week.  U.S. stocks have recovered their losses, while mortgage rates have continued to improve at the same time.  As a result, mortgage rates ended the week at the best levels in years.

Following the British vote on June 23rd to exit (Brexit), it has been a volatile period for financial markets.  For the first couple of days after the vote, both U.S. stocks and U.S. mortgage rates declined significantly.  However, later in the week the stock market recovered nearly all of its losses, while mortgage rates moved even lower.  Typically, an event such as Brexit which adds a high level of uncertainty for investors causes a shift to safer assets (such as mortgage backed securities).  Then, when the consequences become clearer, there is a reversal as investors become more willing to again hold riskier assets.  What makes the market reaction to Brexit unusual is that mortgage rates continued to improve even as investors added riskier assets back to their portfolios.

One reason that bonds have continued to improve while stocks have rallied is that investors expect looser monetary policy from global central banks in the wake of the Brexit vote. On Thursday, officials from the Bank of England said that further stimulus likely will be needed to smooth the transition.  Many investors also expect that the European Central Bank (ECB) will add stimulus to attempt to boost economic growth.  In addition, Brexit likely will cause the U.S. Fed to wait longer before raising the federal funds rate.  Looser monetary policy has been viewed as good for both stocks and bonds. 

While the services sector in the U.S. has held up well, the manufacturing sector has struggled over the past couple of years.  Headwinds have come from a stronger dollar and economic weakness overseas.  The most recent reading for the ISM national manufacturing index surpassed expectations and rose to the highest level in sixteen months. 

Looking ahead, the important monthly Employment report will be released on Friday.  As usual, this data on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month.  Before that, the Fed minutes from the June 15 meeting will come out on Tuesday. These detailed minutes provide additional insight into the debate between Fed officials and have the potential to significantly move markets.
480.776.2954 is Stuarts number.