China Devalues Currency

China Devalues Currency

A surprise move in China helped mortgage rates improve early in the week. Stronger than expected U.S. economic data had the opposite effect later in the week. After the offsetting influences, mortgage rates ended slightly higher.

China has long held its currency, the yuan, at a fixed value versus the dollar. On Tuesday, China unexpectedly implemented a policy change which let the value of the yuan drop versus the dollar.  Mortgage rates improved on the announcement because investors saw the move as an indication that the Chinese economy is slowing more quickly than expected. If this is true, global inflationary pressure will fall. In addition, US exports to China likely will slow as U.S. goods and services will be more costly, further reducing inflationary pressure. Lower inflation is positive for mortgage rates.

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Recent U.S. economic data told a different story about the outlook for inflation. Retail sales account for about two-thirds of U.S. economic activity. The report released Thursday revealed that retail sales rose solidly in July, but this was expected. The surprise was that the disappointing results for June were revised significantly higher. Friday’s report on industrial production, another important indicator of economic activity, also exceeded expectations.


Looking ahead, Housing Starts will come out on Tuesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Wednesday. The Minutes from the July 29 Fed meeting also will be released on Wednesday. These detailed Minutes provide additional insight into the debate between Fed officials. Existing Home Sales and the Philly Fed regional manufacturing index will come out on Thursday.

China and Greece Still Left With A Big Question Mark

China and Greece Still Left With A Big Question Mark!

Over the past week, U.S. financial markets were influenced primarily by events in China and Greece. Concerns about slower growth in China and increased uncertainty about Greece were both favorable for mortgage rates, which ended the week a little lower.

China is the second largest economy in the world, and it is growing at a much more rapid pace than the U.S. or Europe. This means that China is responsible for a large portion of global economic growth. Recently, investors have become more concerned that the pace of China’s economic growth may be slowing more quickly than expected. Slower global growth reduces expectations for future inflation, which is positive for mortgage rates.

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The outcome of Sunday’s Greek referendum was not the expected result. The Greeks voted against accepting the reform measures demanded by creditors in return for additional aid. Greece already is unable to repay its debts, and another large payment is due on July 20. Economic conditions in Greece are worsening. Greek officials and creditors are continuing to negotiate, but it is still not certain whether a deal will be reached. Without a bailout, Greece may be forced to exit the European Union. The uncertainty has increased demand for relatively safer assets, including U.S. mortgage-backed securities.

 


 Looking ahead, investors will be watching for progress in the Greek bailout negotiations and for clues about the pace of economic growth in China. In the U.S., the Retail Sales report will be released on Tuesday. Retail sales account for roughly 70% of economic activity, making this one of the most important reports each month. Industrial Production, another indicator of economic activity, will be released on Wednesday. Housing Starts and the Consumer Price Index (CPI) will come out on Friday. CPI looks at the price change for finished goods which are sold to consumers. 

Article provided by MBSQuoteline