Increased concerns about the outlook for global economic growth and about numerous geopolitical events deflated global stock markets and benefited mortgage rates this week. However, the latest news on the trade talks between the U.S. and China mostly offset this, and rates ended another volatile week just marginally lower.
Investors face a lot of significant questions on a wide range of issues right now, and it’s no surprise that they have responded to the increased uncertainty by reducing the level of risk in their portfolios. As usual, their primary method to accomplish this has been to shift assets from stocks to bonds, including U.S. mortgage-backed securities (MBS).
The trade tensions between the U.S. and China remain one of the largest sources of concern for investors, because tariffs and other barriers to trade slow global economic activity. The biggest news on this front this week was the announcement that the U.S. will delay until December 15 tariffs on some goods that had been scheduled to be imposed on September 1.
The outlook for global economic growth is another big question mark for investors. Around the world, recent data clearly indicates that the manufacturing sector has taken a hit from trade issues, and business investment has fallen as companies hesitate to make long-term capital commitments. On the other hand, consumer spending has generally remained healthy. In the world’s second-largest economy, for example, Alibaba (“the Amazon of China”) just released strong earnings results.
In the U.S., the data released this week also demonstrated the continued strength of consumers. In July, Retail Sales surged 0.7% from June, which was well above the expected increase of just 0.3%. This marked the fifth straight month of solid gains, boosted in no small part by Amazon Prime Day and competing sales events at other retailers.
In addition, several geopolitical events around the world are concerning. The list includes large scale protests in Hong Kong, trade tensions between Japan and North Korea, serious economic troubles in Argentina, the British exit from the European Union, and upcoming elections in Italy.
It’s worth noting that mortgage rates have not dropped nearly as quickly as long-term Treasury yields. This is not uncommon during periods of rapid declines in bond yields due to prepayment characteristics inherent only in MBS.
Looking ahead, it will be a very light week for economic data. Existing Home Sales will be released on Wednesday and New Home Sales on Friday. The minutes from the July 31 Fed meeting will come out on Wednesday. These detailed minutes provide additional insight into the debate between Fed officials about future monetary policy and have the potential to move markets. In addition, news about the trade negotiations could influence mortgage rates.