Increased Optimism on Trade – November 2019 Edition

The trade negotiations with China dominated the economic news this week. Unexpected signs of progress in reaching a deal were unfavorable for mortgage rates. Stronger than expected economic data also was negative, and rates climbed to the highest levels since late July.

On Thursday, a Chinese trade official said that both sides have agreed to simultaneously remove some existing tariffs. This caused investors to grow more optimistic that a limited “phase one” trade agreement will be signed. The phase one deal reportedly contains some of the easier concessions for each side to make. More difficult issues such as the protection of intellectual property will be addressed in future discussions. Even the phase one deal is not a sure thing, however, as later reports indicated that some U.S. officials are opposed to any tariff reductions until an agreement has been reached in a wider range of areas.

The tariffs and other restrictions imposed this year in the trade war have slowed global economic activity. This has reduced the outlook for future inflation, which has been positive for bonds. As a result, this week’s news which indicated progress in reaching a trade deal was unfavorable for bonds, including mortgage-backed securities (MBS), causing mortgage rates to rise.

The most significant economic report released this week was the survey of the services sector from the Institute of Supply Management, and its strength also was negative for mortgage rates. After falling to the lowest level in over three years last month, the ISM national services index rose more than expected to 54.7. The services sector accounts for over two-thirds of U.S. economic activity, and readings above 50 signal an expansion.

Looking ahead, The Consumer Price Index (CPI) will come out on Wednesday. CPI is a widely followed monthly inflation report that looks at the price change for goods and services. Retail Sales will be released on Friday. Since consumer spending accounts for about 70% of all economic activity in the U.S., the retail sales data is a key indicator of growth. In addition, speeches by Fed officials or news about the trade negotiations with China could have an influence. Mortgage markets will be closed on Monday in observance of Veterans Day.

Weekly Change
10yr Treasury rose 0.20
Dow rose 300
NASDAQ rose 75
Wed 11/13 CPI
Fri 11/15 Retail Sales
Fri 11/15 Industrial Prod.

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