This past week the Federal Reserve cut the Fed Funds Rate for the third time this year, by .25%. Along with the rate cut, the Fed released a statement that suggested a “pause” in further cuts, but stated they will be ready to act again should “slowing global conditions” continue or if inflation declines further.
Speaking of inflation, it is important to remind ourselves that the Fed rate cut does not affect home loan rates. Home loan rates are slightly higher than they were right before the Fed started cutting rates in July. The main driver of long-term rates is inflation. If inflation goes up, long-term rates go up. The opposite is also true.
With that said, here’s an important quote from Fed Chairman Jerome Powell yesterday: “I think we would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation concerns.” This means that the Fed is not likely to hike rates anytime soon, and long-term rates should not go too high too soon either because there is no threat of high inflation at this time.
Bottom line: home loan rates are near three-year lows and this week’s modest price improvement can be quickly erased should good news regarding U.S./China emerge.
Forecast for the Week:
After last week’s risk-event filled reports, headlines, and earnings, the upcoming week’s economic calendar and newsworthy events may pale in comparison.
The headlines that the markets will cling to will be the ongoing U.S./China trade issues. Late last week a Chinese official doubted a long-term deal with the White House could be hammered out but hopes for a “phase one” signing in the next two to three weeks are bright.
Corporate earnings season will also continue in the upcoming week with most companies already reporting and beating expectations. Of the S&P 500 companies that have reported thus far, about 75% have exceeded profit estimates.
The Treasury will be selling a boatload of notes and bonds with the 10-year offering as a highlight.
Reports to watch:
- The only reports that could impact the markets this upcoming week are Tuesday’s ISM Service Index and Friday’s Consumer Sentiment Index.