Last Friday's Employment report left investors feeling good about buying bonds, and mortgage rates improved over the first half of the week. However, an announcement from President Trump on Thursday was negative for bonds, and a partial reversal took place. After a couple of weeks with relatively little net change, mortgage rates ended the week a slightly lower.
The much weaker than expected wage growth in the Employment report released on February 3rd eased investor concerns about future inflation. Lower inflation increases the value of future cash flows from bonds. With little economic news early in the week, investors purchased bonds, including mortgage-backed securities (MBS). Since mortgage rates are set based on MBS prices, rates declined.
On Thursday, President Trump said to expect an announcement about tax cuts in two to three weeks (mortgage rates moved a little higher after the comment). One reason why tax cuts are viewed as negative for mortgage rates is that they increase the wealth of the affected individuals or businesses. As they spend some of this money, it boosts economic activity, which in turn raises the outlook for future inflation.
The report on Consumer Sentiment released on Friday showed that consumers remained optimistic about economic activity. While the reading was a little below the 13-year high seen last month, it was still quite high by historical standards. This survey from the University of Michigan measures the level of optimism or pessimism about current and future economic conditions.
Looking ahead, Retail Sales will be released on Wednesday (consumer spending accounts for about 70% of economic output in the U.S.), and the retail sales data is a key indicator. Housing Starts will be released on Thursday.