Rising expectations for looser global monetary policy outweighed stronger than expected major U.S. economic data this week, and mortgage rates ended a little lower.
Early in the week, comments from European Central Bank (ECB) officials suggested that there may be a rate cut soon to help stimulate economic activity. Then the U.S. Fed’s Williams made an unexpectedly dovish speech on Thursday in which he appeared to lay out the reasoning for a rate cut at the next meeting on July 31. Despite the continued solid performance of the economy, he said that it is “better to take preventative measures” at “the first sign of economic distress” than to wait too long. As a result, investors raised their expected likelihood for a 50 basis point rather than a 25 basis point rate cut.
After a lengthy period with extremely volatile results, the Retail Sales data has been unusually stable over the last three months. In June, retail sales rose 0.4% from May, double the consensus forecast for an increase of just 0.2%. Since consumer spending accounts for roughly 70% of U.S. economic activity, the strong recent readings have caused analysts to raise their estimates for next week’s highly anticipated release of second quarter GDP growth.
The uncertainty caused by the tough trade negotiations with China has put a damper on manufacturing activity this year, so Thursday’s much stronger than expected results for the Philly Fed regional manufacturing caught investors by surprise. From a reading close to zero last month, the index jumped to 21.8, which was far above the consensus forecast of 5.0. Readings above zero indicate an expansion, and investors will be closely watching future reports to see if this was the start of an upward trend.
In contrast to the consumer spending and manufacturing data, this week’s report on home construction fell a bit short of expectations overall. In June, total housing starts dropped 1% from May, but the weakness was entirely due to multi-family units, and single-family starts posted solid gains. Building permits dropped 6% from May to the lowest level since May 2017. Builders continued to cite rising labor and land costs, along with a shortage of skilled workers, as the primary obstacles holding back more rapid construction.
Looking ahead, Existing Home Sales will be released on Tuesday and New Home Sales on Wednesday. The next European Central Bank (ECB) meeting will take place on Thursday, and investors expect the ECB to hint at a rate cut as soon as September. Gross Domestic Product (GDP), the broadest measure of economic growth, will come out on Friday. In addition, news about the trade negotiations may influence mortgage rates.