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Potential Rate Cut Overshadows Strong Economic News

Overview: Ahead of highly anticipated U.S. Fed and European Central Bank meetings, expectations for looser monetary policy overshadowed the other economic news and caused mortgage rates to move a little lower this week.


The housing data released over the past week contained mixed news. Sales of previously owned homes in June held roughly steady from May at levels well above those seen at the start of the year. Median prices reached record highs that were up 4% from a year ago. The inventory of homes on the market remained relatively low, however, at just a 4.4-month supply. Sales of new homes in June increased 7% from May, but investors had expected an even larger rebound from last month’s weak results. According to the National Association of Realtors®, current economic conditions remain favorable for the industry, with a strong labor market, rising wages, and lower mortgage rates, but a housing shortage continues to hold back stronger sales activity.

The uncertainty caused by the ongoing trade talks has been a headwind for global manufacturing activity this year, and the most recent readings from Europe reflected this. However, a much stronger than expected report in the U.S. from the Federal Reserve Bank of Philadelphia’s regional manufacturing index revealed surprising results. From a level close to zero last month, the index surged to 21.8, which was far above the consensus forecast of 5.0. Readings above zero indicate an expansion in the U.S. manufacturing sector.

Week Ahead

Looking ahead, investors will be focused on the central banks. The next Federal Reserve meeting will take place on July 31, and investors expect a rate cut of 25 basis points, with a small probability of a larger decrease of 50 basis points. Before that, there will be a European Central Bank (ECB) meeting on Thursday, with investor expectations set for new stimulus measures, or at least the announcement of upcoming looser monetary policy. Second-quarter U.S. gross domestic product (GDP), the broadest measure of economic growth, will come out on Friday. In addition, the U.S. and China are expected to resume their trade negotiations early next week, and any news could influence mortgage rates.

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