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Rates Move Higher as U.S. and China Draw Closer to Trade Deal

April 3, 2019

 

Overview: After falling to the lowest levels in more than a year, mortgage rates moved a little higher over the past week. Increased optimism about the pace of global growth and the prospects for a trade deal between the U.S. and China were the main reasons, while the U.S. economic data had little impact.

On Wednesday, it was reported that the U.S. and China were close to reaching a trade deal. While a top official at the U.S. Chamber of Commerce acknowledged that the remaining issues are the most difficult ones, he also said that “ninety percent of the deal is done.” Since a reduction in tariffs would lead to an increase in global economic activity, this news was negative for mortgage rates..

 

Since consumer spending accounts for about 70% of all economic activity in the U.S., the monthly retail sales data is one of the most closely watched reports. In recent months, however, it has been heavily influenced by temporary factors that have made it more difficult to determine the underlying trend. After a massive decline in December, sales bounced back nicely in January, but then unexpectedly fell a bit in February. Stock market volatility late last year, the government shutdown, and unusual weather patterns have significantly affected the recent results.

 

One positive factor for mortgage rates this year is that inflation has remained moderate. Despite a tight labor market, wage growth has been modest, and overall inflation levels in the economy have been constrained. In January, the core Personal Consumption Expenditures (PCE) Price Index, the inflation indicator favored by the Fed, was just 1.8% higher than a year ago. This is below the Fed's stated target for annual core inflation of 2.0%..


Week Ahead 

Looking ahead, the important monthly Employment Report will be released on Friday. As usual, 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 April 10. CPI is a widely followed monthly inflation report that looks at the price change for goods and services. The next European Central Bank (ECB) meeting also will take place on April 10. In addition, news about the British exit (Brexit) from the European Union could affect mortgage rates.

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