The Brexit Adjustment: The Weekly Market Update

The Brexit Adjustment

Europe Awakens

Sometimes it is hard to explain why certain things happen in the markets. Much of the time the markets seem to have a mind of their own, and market analysts are reaching for explanations as to what happened after the markets moved in one direction or another. Of course, usually there are several factors affecting the markets at once and it is typically impossible to determine which is the dominant factor.

For example, let’s discuss the recent movement in interest rates. The Federal Reserve Board has raised rates three times in the past six months or so. To the public, this would indicate higher rates to borrow money to purchase homes or cars. But as we have indicated previously, the Fed controls short-term rates and they have an indirect influence on long-term rates. Indeed, the Fed has raised short-term rates by 1.0% overall, but as of a few weeks ago, long-term rates for home loans had barely moved half of that amount.

One reason long-term rates have not moved is the fact that the economy is not overheating and there is no sign of inflation. Job growth continues to be solid, but the economy grew by less than 2.0% in the first quarter. Then why did long-term rates start rising more recently? Remember Brexit and how the markets were worried that slow growth in Europe would affect our economy? Well, apparently Europe has shaken off the Brexit worries and growth is stronger than expected overseas. Like here, there are no signs of the European economies overheating. Thus, while rates remain low, the fact that Europe appears to be awakening from their slumber has put some pressure on the bond markets, and thus our long-term rates.

The Weekly Market Update

Rates moved up for the second week in a row. For the week ending July 13, Freddie Mac announced that 30-year fixed rates rose to 4.03% from 3.96% the week before. The average for 15-year loans increased to 3.29%, and the average for five-year adjustables moved up to 3.28%. A year ago, 30-year fixed rates averaged 3.42%. Attributed to Sean Becketti, chief economist, Freddie Mac -- "After fully absorbing the sharp increases in Treasury yields over the past couple of weeks, the rate on 30-year fixed loans has cleared the psychologically important 4 percent mark for the first time since May. Today's survey rate stands at 4.03 percent, up 7 basis points from last week."

Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.