Overview: With U.S. Federal Reserve and European Central Bank meetings, plus key U.S. gross domestic product and inflation reports, it was a volatile week. However, the many influences were offsetting, and mortgage rates ended with little change.
As expected, the European Central Bank (ECB) statement released at the conclusion of its July 25 meeting laid the groundwork for looser monetary policy. According to the statement, possible easing measures might include rate cuts, additional asset purchases, and cheaper access to loans for banks.
Similarly, it was not a surprise when the U.S. Fed reduced the federal funds rate by one-quarter point on Wednesday, and the meeting statement contained few significant changes from the prior one. Heading in, the main question for investors was whether the Fed would end its asset sales or continue them for two more months as originally planned, and the decision was to stop the portfolio reduction now.
During the press conference, which follows shortly after each meeting, Fed Chair Jerome Powell may have added to the uncertainty about the future policy outlook by describing the rate cut as a “mid-cycle adjustment.” Investors took this to mean that there was no guarantee that this was the start of a downward cycle and reduced their expectations for additional rate cuts.
The latest report on gross domestic product (GDP), the broadest measure of economic activity, revealed growth of 2.1% during the second quarter, which was down from a rate of 3.1% in the first quarter. As usual, the performance of the components varied greatly. Of note, consumer spending continued at a very rapid pace, while uncertainty about trade and global growth hindered business investment.
The core Personal Consumption Expenditures (PCE) Price Index, the inflation indicator favored by the Fed, revealed that inflation remained well below the Fed’s stated target level of 2.0%. In June, core PCE was just 1.6% higher than a year ago, up from an annual rate of increase of 1.5% last month.
Looking ahead, the Institute for Supply Management (ISM) Manufacturing Index will come out on Thursday. The monthly 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 ISM Services Index will come out on August 5. In addition, news about ongoing trade negotiations may influence mortgage rates.