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Tariffs on Mexico?

Overview: The threat of new tariffs on Mexico and tame inflation data were positive for mortgage rates this week, and rates ended at the lowest levels in over a year.


Unsurprisingly, there were few signs of progress in the trade negotiations with China over the past week. Investors were caught completely off-guard Friday, however, when the Trump administration expanded its focus and threatened to place a 5% tariff on all imports from Mexico beginning June 10. Barriers to trade slow global economic activity, so these events were favorable for mortgage rates but bad for the stock market.

The latest data on inflation revealed that it continues to remain in check. Since inflation reduces the value of future cash flows, this was good news for bonds. In April, the core Personal Consumption Expenditures (PCE) Price Index, the inflation indicator favored by the Federal Reserve, was just 1.6% higher than a year ago, down from an annual rate of increase of 2.0% at the end of 2018. The recent tame inflation readings and the uncertainty around trade issues have had a significant effect on the outlook for Fed policy. Most investors now expect that a rate cut will take place later this year.

The other major economic data released this week painted a mixed picture. The Institute for Supply Management (ISM) Manufacturing Index unexpectedly dropped to the lowest level since October 2016, while the ISM Services Index exceeded the consensus forecast. The manufacturing sector accounts for just a small portion of U.S. economic activity, but it responds much more quickly to changing conditions than the services sector. As a result, the two reports are given similar weight by investors, and their contrasting results were roughly offsetting.

Week Ahead

Looking ahead, the next European Central Bank (ECB) meeting will take place on Thursday and could influence U.S. mortgage rates. The monthly U.S. Employment Report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. The Consumer Price Index (CPI) will come out on June 12. CPI is a widely followed monthly inflation report that looks at the price change for goods and services. In addition, news about the ongoing trade negotiations could influence mortgage rates.

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