| With a meeting scheduled for the end of the month between US and Chinese officials to discuss trade policy, it appears that leaders from both countries are taking actions to attempt to gain leverage in the negotiations. Notably, China expanded restrictions on the export of rare earth minerals. President Trump responded by threatening to raise tariffs on Chinese imports by an additional 100%. Some speculation began that the meeting will be cancelled, but so far it is still set to take place. In general, the primary impact of trade wars is a reduction in global economic growth, reducing future inflationary pressures, which would be favorable for mortgage rates.
The latest survey of home builder sentiment on housing market conditions from the NAHB unexpectedly jumped from 32 to 37, far above the consensus forecast of 33 and the highest level since April. Bigger picture, though, the index remained in negative territory below 50 for the eighteenth straight month. According to the Chairman of the NAHB, builders expect a “slightly” improving sales environment due to anticipated easing of monetary policy by the Fed, despite challenges posed by higher costs.
A speech by Chair Powell on Tuesday discussed the appropriate level of bond holdings by the Fed. Powell explained that the Fed keeps reserves so that banks will have access to liquidity to help keep the economy running smoothly. Prior to the pandemic, the Fed held about $4 trillion in Treasuries and mortgage-backed securities on its balance sheet for this purpose. To help boost the economy during the pandemic, massive bond purchases pushed this to a peak of around $9 trillion in 2022. Since then, the Fed has been gradually letting maturing securities roll off its balance sheet to reduce its holdings. Powell suggested that the current level of roughly $6 trillion is likely appropriate based on economic conditions. If so, the Fed may resume purchasing bonds to replace maturing securities, and this potential added demand for MBS was positive for mortgage rates. |
| Looking ahead, investors will continue to watch for additional information about tariffs and monitor comments from Fed officials for hints about monetary policy later in the year. With the government shutdown, it likely will be another light week for major economic data, with one key exception. It has been announced that the Consumer Price Index (CPI), a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services, will come out on Friday. Existing Home Sales, reported by the NAR, will be released on Thursday. |
