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.
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.