After a large decline in 2019 to the lowest levels in several years, mortgage rates turned higher this week for a variety of reasons. Stronger than expected economic data, reduced trade tensions, and a mixed message from European Central Bank (ECB) officials all were negative for rates.
While the manufacturing sector has taken a hit from increased tariffs and other barriers to trade, Friday’s data confirmed that U.S. consumer spending has remained strong. In August, Retail Sales rose 0.4% from July, double the consensus for an increase of just 0.2%. This marked the sixth straight month of solid gains. Supported by a healthy labor market, consumers have shown few signs of slowing heading into the important holiday shopping season.
The inflation data released this week also exceeded expectations. In August, the Core CPI price index, which excludes the volatile food and energy components, was 2.4% higher than a year ago. This was up from an annual rate of increase of 2.2% last month and matched the highest level since 2008.
The latest news about the trade negotiations between the U.S. and China suggested an increased willingness to work together to reach a mutually beneficial deal. U.S. and Chinese officials announced that the imposition of some proposed new tariffs will be delayed. It also was reported that the Trump administration is considering an interim trade deal which would modestly scale back some tariffs while lengthier negotiations on a more comprehensive agreement continued. The next round of trade talks is scheduled to take place early in October. Since a reduction in trade restrictions encourages global economic activity, these developments were negative for mortgage rates.
Thursday’s announcement from the European Central Bank (ECB) was one of the few pieces of good news for mortgage rates this week, but its effect was mostly reversed later in the day following less favorable comments from ECB officials. To help stimulate economic growth, the ECB cut rates and announced that it will resume a bond buying program which had ended in December. According to its statement, the ECB will purchase 20 billion euros per month of eurozone debt for “as long as necessary.” This aggressive monetary easing initially pushed global bond yields lower, but it was later reported that many officials were in favor of smaller policy changes.
Looking ahead, the next U.S. Fed meeting will take place on Wednesday. Most investors expect a 25 basis point rate cut, but forecasts vary widely on what the Fed will signal about the outlook for future policy. The primary economic data will be from the housing sector. Housing Starts will be released on Wednesday and Existing Home Sales on Friday. In addition, news about the trade negotiations could influence mortgage rates.
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