Strong economic data pressures mortgage rates
Mortgage rates gave up some of the improvements we saw last week. The geo-political situation has mellowed out just enough to shift the focus back on the economy.
Italy has installed a new government; their debt situation is not resolved but things have calmed down for now. As of this writing, (Friday June 1st 3:03 pm Pacific time) the summit with N. Korea is back on again for June 12th.
Strong economic news this week shows growth in manufacturing and continued strength in the employment data. Our economy still adding an average of 179k jobs per month. Wages still only ticking up slightly at 2.7% (YOY). This just barely above the inflation rate, currently at 2.00%. GDP was revised from 2.3% down to 2.2% for 1st quarter, this is now old data so not a factor with rates. Personal spending is up .6% versus estimates of .4%. This could have been impacted by the recent rise in oil prices, but people are spending money.
Bank of Japan started its taper program reducing its bond purchases from 450 billion to 430 billion. Still unsure when the European Union will start its taper, but it seems to be the direction all of the central banks are taking. We have discussed this many times, the central banks have propped up the economy by being the largest purchaser of sovereign debt. Rates would be much higher without this artificial support. It remains to be seen if they will follow through. Last week I discussed why the Fed would use any excuse to pause.
The President moved forward on tariffs for Mexico, Canada, and Europe. All who promised to retaliate. Bonds haven’t really reacted much. Remember the buyer for mortgage bonds has a long term outlook (30 years). The long bond purchaser has to consider what the outcome of the tariffs will be. In the near term, the tariffs will raise costs causing inflation; bonds hate inflation and will react by selling their holdings and mortgage rates will rise. However the long term outlook is that tariffs will slow growth and hurt the economy, causing mortgage rates to improve. So there may be a tug of war on this for some time as everyday the story changes on who is going to do what to the other side. Keep watching.
Housing news: April Pending home sales down 2.1% over April last year. This is the 3rd straight decline. Mortgage applications down 2.9%, for the 5th week in a row. Construction spending ticked up to 1.8%, higher than expected, a sign of rising construction costs.
Commentary:
“We want to avoid competition and yet it is competition that effectively protects us”- Milton Friedman, one of the greatest economist of all time.
Variety and alternatives protects the worker by giving him choices for employment; more competition causes wages to rise as employers compete for workers. Competition protects companies by giving them access to other employees, and naturally competition protects the consumer by giving alternative choices.
Workers try to protect their position through unions with collective bargaining power. Companies try to limit competition and create monopolies using government intervention like tariffs, import restrictions, and other regulations that limit or reduce entry.
Both parties claim to support the American worker but they have very different approaches. Tariffs are being touted as one of the ways the current administration plans to bring back American jobs and negotiate better trade deals. On the other side of the aisle, mandated minimum wages and forced unions are what will protect the worker. Both parties solutions limit competition and give them more control. At every opportunity, get the government out of the way and a truly free market will resolve the issues.
Competition will protect the American worker.
Source:https://jasonstapleton.com/783-who-protects-the-worker/
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