Rates jump back up as Trump stokes market volatility
The Federal Reserve will almost certainly ease rates again at the upcoming Federal Open Market Committee meeting. Right now, Fed fund futures are pricing in a 100% change of a rate cut at September's meeting. Despite consistent pressure from The White House, Federal Reserve Chairman Jerome Powell is staying dedicated to his stance of not bowing to political pressure.
Right now the United States is the only major world power with central bank rates in the positive across the board. Earlier this week President Trump called for the Fed to cut interest rates to zero or even put them into the negative. Other world powers have gone into the negative in an effort to boost economic growth. There are many analysts who agree that the Fed should continue to cut rates, potentially down to zero to ward of recession, but caution against dipping into the negative.
When the Fed cuts rates, it means that it becomes less expensive for banks to borrow money. In theory, the banks would then be able to pass that saving on to the consumer and make it less expensive for them to borrow money in the form of loans and therefore encourage spending.
Another potential push for the Fed to cut rates would be weaker than expected retail sales. The Commerce Department's data published Friday morning shows a moderate rise with a 0.4% jump in August. There was a jump in car purchases but when you take that out, retail sales were unchanged. This signals that American consumers are starting to proceed with a little more caution, likely related to the trade war with China.
The producer price index went up by 0.1% in August, according to the Labor Department. The core PPI, which excludes volatile products like energy and food, jumped by 0.4% in August. The consumer price index rose above expectations, jumping by 0.26% in August and 2.4% year-over-year. Analysts at Goldman Sachs estimate that the core personal consumption expenditure, or PCE, will have gone up by 0.15% month-over-month in August. The core PCE is one of the main measures of inflation tracked by the Fed. Because of this data, Goldman is pricing in a 95% chance of a 25 basis point cut at the Fed's meeting next week.
Mortgage rates, however, jumped back up this week, to 3.56% from 3.49% just last week according to Freddie Mac. Their analysis shows that purchase mortgage applications are up 9% from a year ago, which makes sense considering rates are more than a full percentage point lower than this week last year. Freddie Mac's analysis also shows that the demand does point to "healthy underlying consumer economic fundamentals such as a low unemployment rate, solid wage growth and low mortgage rates."
Chief economist for the National Association of Realtors, Lawrence Yun, believes rates could hit an all-time low of 3.3% by the end of the year. Since Freddie Mac started keeping track of mortgage rate averages in 1971, the lowest recorded 30-year fixed rate average was 3.31% in 2012.
However, Yun encourages cautious optimism with regard to the housing market saying "..lower rates may not help with affordability because home prices are re-accelerating higher, easily above the latest wage growth."
GLOBAL ECONOMIES CONTINUE TO STRUGGLE
A new wrinkle in the trade dispute between the United States and China as President Trump has delayed tariff implementation by two weeks in what he calls a gesture of "good will." The scheduled increase to 30% from 25% will now go into effect on Oct. 15 instead of Oct. 1. Trump said this was "at the request of the Vice Premier of China, Liu He, and due to the fact that the People's Republic of China will be celebrating their 70th Anniversary."
The tariffs already in place have started causing issues for China's economy. Chinese exports to the United State fell sharply in August, by 16% year-over-year. So now, for the seventh time since early 2018, China's central bank cut reserve requirements so funds could be freed up for lending.
China is the world's second-largest economy and the trade war has unearthed a new, potentially serious issue, for the country's finances. In an opinion article for CNBC, Jake Novak writes that decoupling is potentially the biggest issue China faces as the trade war drags on. Right now America relies heavily on China for manufacturing, but now, the door has been opened for the U.S. to move to other countries for that resource. Google is moving some smartphone production to Vietnam and could move smart home speaker production to Thailand. The U.S. is the world's top consumer market and, as Novak writes, is clearly looking to shop around.
Meanwhile, the United Kingdom Parliament is closed for the next five weeks as the Brexit deal looms. While members have blocked the potential for a no-deal Brexit, they have also rejected three different deals for Brexit. As it stands, the U.K will leave the European Union Oct. 31 with or without a deal. If there is still no deal, and Parliament members refuse a no-deal Brexit, the EU would have to grant yet another delay. Mind you, it has been three years since the initial vote.
