Potential Trade Deal – October 2019 Edition

Increased optimism about a trade deal was negative for mortgage rates this week. The economic data and the news from the Fed had little impact, and mortgage rates ended the week higher.

The trade talks between the U.S. and China resumed on Thursday, and comments from officials have suggested that the two sides are close to reaching a limited agreement. Reports hinted that a deal might include increased agricultural purchases, curbs on currency manipulation, and delays in the implementation of new tariffs. Tougher issues such as the protection of intellectual property would be addressed in future talks. A key meeting between President Trump and Chinese Vice Premier Liu He is scheduled to take place on Friday afternoon.

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, the possibility of a trade deal was unfavorable for bonds, including mortgage-backed securities (MBS), causing mortgage rates to rise.

The latest data released this week revealed that core inflation held steady. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. In September, Core CPI, which excludes the volatile food and energy components, was 2.4% higher than a year ago, the same annual rate of increase as last month.

This week’s comments from the Fed contained no significant new information. On Tuesday, Fed Chair Powell again explained that the Fed will allow its balance sheet to grow roughly in line with the size of the economy to provide adequate liquidity for the needs of financial institutions. The minutes from the September 17 Fed meeting released on Wednesday confirmed that officials remained divided about the appropriate path for future monetary, primarily due to uncertainty about the impact of increased trade restrictions on the economic outlook.

Looking ahead, Retail Sales will be released on Wednesday. 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. Housing Starts will come out on Thursday. In addition, news about the trade negotiations could influence mortgage rates. Mortgage markets will be closed on Monday in observance of Columbus Day.

Weekly Change
10yr Treasury rose 0.20
Dow rose 300
NASDAQ rose 100
Wed 10/16 Retail Sales
Thu 10/17 Housing Starts
Thu 10/17 Industrial Prod.

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