Friday Wrap: Fed Moves to Curb Interest Rates, Oil Causing Volatility

Fed Takes Action Against Global Growth Slowdown

The trade war between the United States and China continues to drive monetary decisions by the Federal Reserve as it battles against slowing global growth. The U.S. economy is still in good shape and the latest jobs report have shown employment is high, but the global economy combined with trade issues have seemed to force the Fed into action. 

It was a rollercoaster this week for the Federal Reserve as it had to push cash into the markets, called a money market operation, to help curb the spike in short-term interest rates. The Fed enacted another operation Wednesday in order to bring short-term rates down from the 10% rate it hit earlier in the week. That actually pushed the Fed’s benchmark interest rate to 2.3%, above the benchmark high of 2.25% it set in July. 

Then, as expected on Wednesday, the Federal Open Market Committee members voted to cut overnight lending rates by 25 basis points, bringing the target rate to 1.75% from 2%. That is the second rate cut by the FOMC this year. Fed Chairman Jerome Powell has reiterated time and again that the FOMC will act as appropriate to keep the balance of positive and negative economic signals.

Chief Investment Strategist at Northwest Mutual, Brent Schutte, said “The Fed has to determine what the risk of not acting is, and right now the cost-benefit analysis favors doing something rather than nothing.”

As the Fed has cut overnight lending rates, mortgage rates for homebuyers have jumped back up. This week the 30-year fixed-rate mortgage average jumped up to 3.73%. That’s nearly .25% higher than we saw just two weeks ago. Housing activity has finally shown signs that it’s gaining momentum as purchase applications are up 15% from a year ago. 

Housing starts also hit a 12-year high in August, with single-family starts increasing by 4.4%. Building permits also increased by 7.7%, which was above expectations, with a 4.5% increase in single-family permits. That data had Goldman Sachs boosting its Q3 Gross Domestic Product estimate by one tenth to 2.2% growth.

Oil and Trade Causing Volatility

The United States and China have been trading jabs in a tariff battle that’s lasted for more than a year, and still, there seems to be no clear resolution ahead. That has led to continued volatility in the U.S. markets as well as global economies. 

In 2018 the United States and China were each other’s top trading partner. In 2019, Canada and Mexico now surpass China in that category. You can see in the chart below from CNBC the fluctuation of U.S. imports, exports and the trade deficit with China.

As of Thursday, deputies from the United States and China were set to get back to negotiations for the first time in two months. It’s expected that agriculture issues will take top priority at these negotiations.

Meanwhile, Saudi Arabia’s stock market took a dive of more than 2% after attacks on some of the country’s main oil production facilities. Oil prices spiked on Thursday due to concerns of supply risks as Saudi Arabia works on getting those facilities working again as they account for more than half of the country’s production. It’s estimated that they will be fully back on track by the end of November. The decrease in production caused prices of oil barrels to jump by $1.33 for Brent Crude and $.56 for U.S. West Texas Intermediate. 

Contributed by Greg Richardson, MAXEX Managing Director

Greg Richardson

Greg Richardson is Managing Director at MAXEX, LLC, based in Atlanta, GA. He has 30 years of experience in capital markets, including trading, banking asset and portfolio management, mortgage banking secondary marketing and accounting. MAXEX is the only platform in the mortgage industry to offer a centralized clearinghouse that enables buyers and sellers to trade anonymously with multiple counterparties using a single standardized contract.