This past week, Fed Chair Jerome Powell reaffirmed the Federal Reserve’s dovish position as he testified on Capitol Hill, thereby paving the way for the first Fed rate cut in 10 years later this month.
Mr. Powell used the word “uncertainties” five times in his prepared speech to describe potential headwinds to the U.S. economy. When things are “uncertain”, here or around the globe, it’s the Fed’s job to be “accommodative” and provide easy monetary policy to stimulate growth and investment, and boost confidence.
Here’s what we have to consider now that the Fed is going to cut rates – potentially by as much as .50% on July 31.
Fed rate cuts are designed to weaken the U.S. dollar, promote inflation, stimulate the economy, boost stock prices, improve confidence, and lift some uncertainty. This is really good news for the economy and housing but at the same time, home loan rates will not move lower in lockstep with a Fed rate cut. In fact, we might see a limit to how low home loan rates move in the near-term as we see how Fed rate cuts make their impact on the economy.
However, there is a tug of war happening which continues to pull our rates lower, and that is the declining global yields in places like Germany, Spain, and Japan. Due to “uncertainties” within their economies, their bond yields and interest rates continue to decline, and as a result our Treasuries and Mortgage bonds push higher in price and lower in rate as well.
Bottom line: The Goldilocks scenario for housing continues. We are seeing home loan rates near the best levels in two years and the Fed is about to embark on rate cuts which are designed to help the U.S. economy avoid a recession. Clients should understand that if the Fed is successful, and the recession fears lift, home loan rates may not improve much further.
After the past few weeks of fireworks given the Jobs report, the Fed, and Fed Chair Powell, the upcoming week could be on the quiet side as the dog days of summer set in, and with many traders and investors on vacation.
There are only a few economic reports set for release with the highlight being Retail Sales, which is a reading on consumer health. The past three months have shown solid consumer spending – will the solid trend continue?
The financial markets will have to deal with the kickoff of quarterly earnings season and the numbers could dictate the direction of the stocks, bonds, and interest rates. If earnings are strong, it could send bond prices lower, yields higher and vice versa. Investors will also have an ear on the tensions in Mideast along with any headlines surrounding the U.S./China trade talks.
Reports to watch:
- Economic data begins on Monday with the Empire State Manufacturing Index followed by the Philadelphia Fed Index on Thursday.
- The closely watched Retail Sales report will be delivered on Tuesday.
- Housing data will come from Tuesday’s NAHB Housing Market Index and Wednesday’s Housing Starts and Building Permits.
- On Friday Consumer Sentiment will be released.