“As Trump performed well in the early voting states and the possibility of his victory grew, long-term Treasury yields and stock futures began to fall.”
The unexpected results in the Presidential election caused significant volatility in the markets, both overnight as the likelihood of a Trump victory grew and the next couple of days as investor expectations for the U.S. economy under Trump became the focus. Mortgage rates ended the week at the highest levels of the year, and the Dow stock index reached a record high.
As Trump performed well in the early voting states and the possibility of his victory grew, long-term Treasury yields and stock futures began to fall. At one point during Tuesday night, the yield on the 10-year Treasury had declined over 10 basis points and stock futures had fallen 5%. The early reaction by investors was a flight to safety. Investors felt that they mostly knew what to expect in a Clinton presidency, but they had more uncertainty about what to expect in a Trump presidency.
Then, as a Trump victory became more certain, investors began to focus on the expected economic consequences of the policies Trump promoted during the campaign. The drop in 10-year yields and in stocks reversed direction. By Wednesday morning, the yield on the 10-year had risen over 25 basis points from the low, and similarly the Dow was 6% above the overnight low. Trump has advocated for greater spending on defense and infrastructure, and at the same time he proposes to cut taxes. These policies raise the prospects for increased deficits and inflation, neither of which are good for mortgage rates.
Looking ahead, new information about the plans of the Trump administration likely will continue to influence mortgage rates. In addition, Retail Sales will be released on Tuesday. Consumer spending accounts for about 70% of economic output in the U.S., and the retail sales data is a key indicator. Housing Starts and the Consumer Price Index (CPI), a widely followed monthly inflation report, will come out on Thursday. CPI looks at the price change for goods and services which are sold to consumers.
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