GDP Below Expectations, But Economy Strengthening

4^th Quarter GDP came in at an annualized rate of 2.6%, which was below expectations on 2.9%.  However, there are components to the report that point to significant strength in the U.S. economy, mainly that consumer spending was at the highest levels since 2015.  The export component of the report was the main driver for the weaker than anticipated results.  With the U.S. dollar continuing to weaken, we should see exports strengthen.  As the value of the dollar declines, it makes U.S goods and services cheaper for consumers using other currencies to purchase.  This will increase demand and allow U.S. manufactures to improve international sales. 

With the Trump Administration seemingly switching course to make efforts to weaken the value of the U.S. dollar, we can anticipate this to be a headwind for mortgage interest rates.  Since much of the U.S. mortgage bond market is owned by foreign investors, a weaker U.S. dollar makes investments here in the states less attractive.  A weaker dollar means that foreign investors will take a loss on the currency exchange when they go to sell their holdings.  Although they may be able to make an additional 2%, for example, the losses on the exchange rate could well surpass the benefits of our higher yields.  As a result, we can anticipate less foreign participation in our bond market.  Since the Fed is also making significantly fewer investments, rates will likely continue to drive higher. 

It’s more of the same story today.  We will maintain our locking bias.