Dow drop won't hurt mortgage rates -- but tomorrow's news may

by Ryan Smith31 Jul 2014
The Dow plunged more than 317 points yesterday, but it shouldn’t have an effect on the mortgage market. However, that doesn’t mean rates won’t go up in the near future.

"Obviously the stock market is important, but mortgage-backed securities have a life of their own right now because the Fed is still buying them,” said Bryan McNee, vice president and senior bond analyst for “They’re not buying as many now, but until they’re buying none, all those things that used to make sense don’t apply. There’s really no correlation right now. You’ve got stock traders looking at a piece of news and reacting one way and bond traders looking at that news and reacting another way. Soon, when the Fed gets out of the bond market, there’ll be a strong correlation again.”

But some forthcoming news could push mortgage rates higher. Tomorrow the government will release its nonfarm payroll and personal consumption expenditures (PCE) numbers, and those could be the signal for rates to start rising.

The Federal Reserve has held interest rates near zero for a long time now, but has said it would begin raising them once inflation was holding steady at more than 2%. With second-quarter GDP numbers already showing a year-over-year PCE growth of 2.3%, PCE growth of 2% or more tomorrow could be a warning sign that the Fed will raise rates soon.

“If you get over 2% once it doesn’t mean the Fed will tighten; they want to see a trendline,” McNee said. “But what you’ll see is traders trying to get out ahead of it. That’ll start pushing up mortgage rates in advance. … Tomorrow is going to be very important.”
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