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Market Analysis Week of 3-8-2021

Mortgage rates have been on an upward path this year, and stronger than expected economic data caused the trend to continue last week.

In addition, Fed officials gave no indication that they intend to attempt to halt the recent rise in yields. As a result, mortgage rates ended the week at their highest levels in months.

Bond Yields Climb

Long-term bond yields, including mortgage rates, have climbed roughly 50 basis points this year due to improving economic conditions. With the vaccine rollout and massive government stimulus, the outlook for economic activity looks extremely promising, which means that inflationary pressures could increase.

Last Thursday, Chair Powell acknowledged the strength but did not give any indication that the Fed intends to attempt to restrain long-term bond yields. According to Powell, Fed officials recognize that stronger economic activity may lead to “transitory increases in inflation,” but that the central bank will be “patient” before changing monetary policy. Some investors had hoped that Powell might indicate that policy changes were under consideration to help contain the rise in long-term yields.

Jobs & Manufacturing Show Improvement

In February, the economy gained a solid 379,000 jobs, which was roughly double the consensus forecast. Strength was seen in the leisure and hospitality sector, which was hit particularly hard by the pandemic. From a level of 6.3% last month, the unemployment rate unexpectedly fell to 6.2%. Average hourly earnings, an indicator of wage growth, were an impressive 5.3% higher than a year ago, matching expectations.

Two other closely watched reports released last week contained mixed results. The ISM national manufacturing index rose to 60.8, above the consensus forecast of 59.0, up from a low of 41. in April, and matching the highest level since 2004. By contrast, the ISM national services index declined to 55.3, well below the consensus forecast of 58.5, and the lowest level since May. Readings above 50 indicate an expansion, meaning that both sectors are growing but at different speeds.

Major Economic News Due This Week

Looking ahead, investors will continue watching Covid case counts, vaccine distribution, and the size of the government stimulus spending bill. Beyond that, the Consumer Price Index (CPI) will come out on Wednesday. CPI is a widely followed monthly inflation report that looks at the price change for goods and services. The next European Central Bank meeting will take place on Thursday.

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