Strong Demand for US Bonds

The economic data released this week contained mixed results and had little impact on mortgage rates. Strong demand for US fixed income securities was the main influence this week, helping mortgage rates end the week a little lower.

There were strong indications this week that foreign investors, most likely in Japan and China, increased their purchases of US bonds, including mortgage-backed securities (MBS). The currencies of Japan and China have weakened recently versus the dollar, and the economic policies currently in place in both countries have caused investors to expect their currencies to weaken further. This makes US bonds more attractive to investors in those countries as the investor not only receives interest on the investment, but also expects appreciation in the value of the investment.

After a couple of months of weaker readings, the New Home Sales report released this week was a pleasant surprise. January New Home Sales jumped 10% from December to an annual rate of 468K units, far above the consensus of 400K. This was the highest level since July 2008. Also released this week, January Pending Home Sales posted a slight increase.

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Jobs and Manufacturing Fall Short

This week's key economic data showed that the performance of the economy in January was weaker than expected. The shortfalls caused stocks to decline and mortgage rates to improve, but the impact was surprisingly small.

Both the Employment report and the ISM Manufacturing data saw big misses. Against a consensus forecast of 185K, the economy added just 113K jobs in January. Also disappointing, many investors had hoped to see a large upward revision to the weak December reading, but it was little changed. The ISM national manufacturing index declined sharply to 51.3, far below the consensus of 56.0. For perspective, the increase in jobs reflects improvement in the labor market, and readings above 50.0 indicate an expansion in the manufacturing sector. The issue is that the pace of economic growth has slowed.

The relatively minor impact of this week's data must be considered in light of the performance of the stock and mortgage markets so far this year. Entering the week, stocks had experienced significant losses, as the Dow was down roughly 5% in January. Similarly, mortgage rates have seen significant improvement since the start of the year. To some degree, investors were already positioned for weak data this week. In addition, questions about the effect of unusually severe weather caused some investors to question how accurately recent data reflects the underlying strength of the economy.