Talk of trade deals and tariffs delivered the market moving news this week as bond yields ebbed and flowed with news of a trade deal with Mexico, negotiations with Canada and the next round of tariffs on Chinese goods.
Markets reacted with optimism to news this week of a new trade deal between the Trump administration and Mexico. The deal to replace the existing NAFTA policy, which would have to be approved by Congress, places new restrictions on the automotive industry by increasing requirements for parts of vehicles to come from North America in exchange for free trade.
The deal, as of Friday morning, lacked buy-in from Canada, which is part of the original NAFTA free trade deal. And with high tariffs on Canadian goods threatened by Trump, the pressure is now on Canada to come to the negotiating table. President Trump issued a Friday deadline for our northern neighbors, and analysts believe Canada will strike a deal.
Equities reeled off a four-day win streak with the S & P and Nasdaq reaching all time highs as the trade talk news made headlines earlier this week. Investors see the deal as a break from trade war threats and an accommodating stance toward North American free trade. Yields on the 10 Year US Treasury edged higher early in the week in response, reaching a near term high of 2.90%.
However, news on Thursday that an additional $200 billion round of tariffs on Chinese goods are likely to be implemented by Trump’s team ended the stock rally as investors returned to trade concerns worldwide. Treasury yields cooled and retreated to the mid 2.80’s.
With mortgage rates following the 10 Year Treasury yield, the trend remains what we’ve seen for months. Upward pressure on yields is consistent as the U.S. economy keeps expanding, but volatile headwinds from trade news and geopolitical risk are keeping a lid on larger increases. Global peace and domestic growth will keep pushing rates higher, but uncertainty on trade and politics abroad will reverse increases in fits and starts. Expect this trend to continue.
Economy strong, housing softens
Other economic data this week followed the recent trend: The U.S. economy is expanding, but the housing market may be softening.
- The Conference Board index of consumer confidence increased to 133.4 in August, its highest level since 2000. The increase reflected improved household perceptions of economic conditions.
- The Richmond Fed manufacturing index rose 4 points in August, beating thanks to increases in shipments, new orders, employment and wages. Taken together with the mixed reports from other Fed districts this month, the Richmond survey is consistent with continued growth in the manufacturing sector.
- The S&P/Case-Shiller 20-city home price index dipped to a 6.4 percent increase year-over-year, compared to 6.5 percent in the prior month. Las Vegas had the largest price gains. New York had the biggest decrease.
- Pending home sales, a leading indicator of existing home sales, declined 0.7 percent in July, below expectations. The report adds to the string of softer housing data in recent months and softer numbers are likely to continue heading into the slower season.