Despite key labor market data and a highly anticipated Fed meeting, it was unexpected news about the trade negotiations which had the greatest influence on mortgage rates this week. Increased trade tensions are positive for rates, and they ended at the lowest levels in years.
Thursday, President Trump announced that the U.S. will impose additional tariffs of 10% on $300 billion of goods imported from China beginning on September 1. Trump said that the action will be taken because China has not followed through on prior commitments. An escalation in the trade war reduces the outlook for global economic activity, so this news was favorable for mortgage rates.
Friday’s Employment report was right in line with expectations, and its impact was small. Against a consensus forecast of 165,000, the economy added 164,000 jobs in July. Including these results, average job gains over the first seven months of the year were a solid 165,000, but this was well below the exceptional pace of 223,000 per month in 2018. Strength was seen in Education/Health Services, while the effects of the trade tensions and economic weakness overseas hurt the manufacturing sector.
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.
As expected, the Fed cut rates by 25 basis points on Wednesday, the first reduction since 2008. Eight out of ten officials voted in support of the change, while two dissented in favor of holding rates steady. According to the meeting statement, officials will “continue to monitor” incoming data and will “act as appropriate to sustain the expansion.” The Fed also decided to end the asset sales from its portfolio right away instead of two months from now as originally planned.
By far the biggest surprise from the Fed came during Chair Powell’s post-meeting press conference when he described the rate cut as a “mid-cycle adjustment.” In the past, the first reduction in rates was almost always the start of a series, but Powell’s comment made investors wonder if this one was different, and they reduced their expectations for future rate cuts.
Looking ahead, it will be a much lighter week for economic news. The ISM national services index will be released on Monday. The JOLTS report, which measures job openings and labor turnover rates, will be released on Tuesday. Fed officials value this data to help round out their view of the strength of the labor market. The Producer Price Index (PPI) focuses on the increase in prices of “intermediate” goods used by companies to produce finished products and will come out on Friday. In addition, Treasury auctions on Wednesday and Thursday or news about the trade negotiations could influence mortgage rates.