Jul 182017

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By G. Steven Bray

The strongest gorilla in the room for mortgage rates still is the European Central Bank, but US political uncertainty has been pumping iron.

Back in Jun, the head of the ECB caused a quick rate spike suggesting the ECB will start tapering its asset purchases soon. While this really shouldn’t have surprised anyone, markets didn’t appreciate being faced with reality. The ECB promptly tried to walk back the idea, but markets know the taper is coming.

The ECB meets again this Thurs. Markets don’t expect a tapering announcement yet, but any shift in language will be parsed for hidden meanings. If the ECB is mum about tapering, it could add to the recent positive momentum for rates.

That momentum seems to be the result of soft US inflation data and relatively dovish comments from the Fed. The inflation data is old news, but it’s still very relevant. The Fed comments represent a shift, especially Fed Head Yellen’s Congressional testimony that the Fed is very close to what it considers a neutral policy rate, meaning the Fed is almost done hiking rates.

The new gorilla is US political uncertainty, and it could provide downward pressure on rates for the next few months. The Senate pulled the Obamacare replacement bill, which only adds question marks for the rest of this year’s Congressional agenda. Congress wants tax reform; Congress should pass a budget; Congress must deal with the debt ceiling – all of this by the end of Sep?

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