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Trade War Escalates, Rates Move Lower

August 7, 2019

 

Overview: Over the past week, an escalation in the trade war between the U.S. and China increased investor concerns about global economic growth, which was very good for mortgage rates and terrible for the stock market. Friday’s key U.S. labor market data was close to expectations and had little impact. As a result, mortgage rates ended at the lowest levels in about three years.

The latest series of trade-related events began last Thursday when President Trump unexpectedly announced that the U.S. will impose additional tariffs of 10% on $300 billion of goods imported from China, beginning on September 1. Officials said that the action will be taken because China has not followed through on prior commitments. The Chinese responded over the weekend by allowing their currency, the yuan, to decline in value in order to make their exports more competitively priced in foreign markets. U.S. trade officials have stated that they want China to do the opposite and strengthen the yuan.

 

An escalation in the trade war reduces the outlook for global economic activity, so this news was favorable for mortgage rates. Barriers to trade such as tariffs essentially act as a tax on exports, making foreign goods more expensive for local consumers. The results of these policies have been seen in the weakening of manufacturing data around the world this year. Due to the uncertainty, companies also have been reluctant to commit to long-term capital investments, further slowing economic activity.

 

The latest U.S. Employment Report was right in line with expectations and caused little reaction. The economy added 164,000 jobs in July, which was very close to the consensus forecast. Strength was seen in education and health services, while the manufacturing sector again was weak. The unemployment rate remained near 50-year lows, at 3.7%. Average hourly earnings, an indicator of wage growth, were 3.2% higher than a year ago, up from 3.1% last month.


Week Ahead 

Tuesday, August 13 — Consumer Price Index (CPI)

CPI is a widely followed monthly inflation report that looks at the price change for goods and services.

 

Thursday, August 15 — Retail Sales report

Consumer spending accounts for about 70% of all economic activity in the U.S. As such, the retail sales data is a key indicator of growth.

 

In addition, news about the ongoing trade negotiations may influence mortgage rates.

 

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