Overview: Mortgage rates, which are at the lowest levels in several years, declined a bit further over the past week. The primary influences were weaker than expected manufacturing data and tame inflation data.

The most closely watched monthly report for the manufacturing sector is produced by the Institute for Supply Management (ISM). The latest reading for the ISM Manufacturing Index revealed a larger than expected drop to 49.1, which was the lowest level since January 2016. Readings below 50 indicate that the manufacturing sector is contracting. The decline in the U.S. is consistent with weakness seen in other countries, as increased trade barriers such as tariffs have slowed global economic activity.

While the manufacturing data was disappointing, investors became more hopeful this week about a positive resolution to the trade negotiations between the U.S. and China. After a series of threatened tariff increases by both countries, the two sides expressed a desire to work together to reach a mutually beneficial deal. In particular, Chinese trade officials said that they "firmly reject an escalation" of the trade war and are willing to continue negotiations with a "calm attitude."

The data released this week showed that inflation continued to hold steady at low levels. The core Personal Consumption Expenditures (PCE) Price Index, which excludes the volatile food and energy components, is the inflation indicator favored by the Federal Reserve. In July, it was just 1.6% higher than a year ago, the same annual rate of increase as last month. This was the fifth straight month of readings well below the Fed's stated target rate of 2.0%.

Week Ahead

September 5 — ISM Services Index

September 6 — Employment Report

September 12 — European Central Bank meeting